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23–733 PDF 2005

GSE REFORM AND THE FEDERAL

HOME LOAN BANK SYSTEM

HEARING

BEFORE THE

SUBCOMMITTEE ON 

CAPITAL MARKETS, INSURANCE AND 

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MARCH 9, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–6

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE AND GOVERNMENT SPONSORED

ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SUE W. KELLY, New York 

ROBERT W. NEY, Ohio 

VITO FOSSELLA, New York, 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

MARK R. KENNEDY, Minnesota 

PATRICK J. TIBERI, Ohio 

J. GRESHAM BARRETT, South Carolina 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

JIM GERLACH, Pennsylvania 

KATHERINE HARRIS, Florida 

JEB HENSARLING, Texas 

RICK RENZI, Arizona 

GEOFF DAVIS, Kentucky 

MICHAEL G. FITZPATRICK, Pennsylvania 

MICHAEL G. OXLEY, Ohio 

PAUL E. KANJORSKI, Pennsylvania 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

ARTUR DAVIS, Alabama 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

March 9, 2005 ................................................................................................... 1

Appendix: 

March 9, 2005 ................................................................................................... 45

WITNESSES 

WEDNESDAY, MARCH 9, 2005

Conners, Joseph F., Executive Vice President and Chief Financial Officer, 

Beneficial Savings Bank ...................................................................................... 38

Hehman, David H., President and Chief Executive Officer, Federal Home 

Loan Bank of Cincinnati ..................................................................................... 32

Meyer, F. Weller, President and Chief Executive Officer, Acacia Federal Savings Bank .............................................................................................................. 34

Miller, Jan, President and Chief Executive Officer, Wainwright Bank .............. 36

Rosenfeld, Hon. Ronald A., Chairman, Federal Housing Finance Board ........... 8

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 46

Gillmor, Hon. Paul E. ....................................................................................... 48

Hinojosa, Hon. Rube ́n ....................................................................................... 49

Kanjorski, Hon. Paul E. ................................................................................... 50

Royce, Hon. Edward R. .................................................................................... 52

Velazquez, Hon. Nydia M. ............................................................................... 53

Conners, Joseph F. ........................................................................................... 54

Hehman, David H. ............................................................................................ 67

Meyer, F. Weller ............................................................................................... 76

Miller, Jan ......................................................................................................... 83

Rosenfeld, Hon. Ronald A. ............................................................................... 89

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Rosenfeld, Hon. Ronald A.: 

Written response to questions from Members of Congress ........................... 94

(1)

GSE REFORM AND THE FEDERAL 

HOME LOAN BANK SYSTEM 

Wednesday, March 9, 2005

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE

AND GOVERNMENT SPONSORED ENTERPRISES

Washington, D.C. 

The subcommittee met, pursuant to call, at 10:05 a.m., in Room 

2128, Rayburn House Office Building, Hon. Richard Baker [chairman of the subcommittee] presiding. 

Present: Representatives Baker, Gillmor, Castle, Royce, Kelly, 

Biggert, Miller of California, Kennedy, Barrett, Feeney, Davis of 

Kentucky, Fitzpatrick, Kanjorski, Meeks, Frank, Baca, Scott, 

Velazquez, Watt, Davis of Alabama, Wasserman Schultz, and 

Maloney. 

Chairman BAKER. [Presiding.] I would like to call this meeting 

of the Committee on Capital Markets to order this morning. 

The subcommittee meets today for the purpose of receipt of testimony on the current regulatory oversight of the Federal Home 

Loan Bank System and the appropriateness of examining and consideration of modifications in light of pending reform to government-sponsored enterprise regulations. 

The bank system was established in 1932 to help facilitate liquidity for the extension of credit for the purchase of homes by individuals. Today, the bank system is composed of 12 separate districts with approximately 8,000 members in the system and is enjoying a growth in its programmatic and financial activities as a result of several legislative changes throughout the years, principally 

the Modernization Act in 1999. 

Of continuing interest to members of the committee is the relationship between the bank system and the taxpayers and the balancing of its social charter. The Secretary of the Treasury under 

certain limited conditions is authorized to extend up to $4 billion 

of credit to the system in the case of financial reversal. 

What is interesting to note, as we have seen the disclosures relative to Fannie Mae and Freddie Mac, which much of the national 

news attention has been given, is that similar growth patterns 

exist among all GSEs. Although the bank system today holds about 

$115 billion of mortgages, not necessarily that significant as contrasted with Fannie or Freddie, equaling about 7 percent of their 

$1.6 trillion currently held, the rate of growth has been significant 

and the amount of debt issuances is at $774 billion, while Fannie 

at $976 billion and Freddie at $757 billion. 

2

So the system itself has great potential for growth, and is it the 

question of the committee whether the authorities granted to the 

system and the required programmatic activities are sufficiently 

being met in light of the significant growth, and whether in the 

current debate over GSE reform significant attention should be 

given to bank system activities and the adequacy of the current 

regulatory structure. 

I wish to point out to the bank system’s credit, I believe, that 

their EDP Program, the Economic Development Program, the Community Investment Program, CIP Program, and others are significant assets to local communities, and with the expansion of the appropriate, to include small business lending and agricultural, there 

is the potential for the bank system to provide meaningful service 

to communities that frankly is not available anywhere else, particularly for the small bank, or the community bank as they are 

typically called, who tends to be more of a portfolio lender holding 

the obligation in their own institution. 

This is a credit window allowing significant cost advantage for 

product and significant length of term, which makes it a very attractive facilitator for the extension of credit to small growth in 

rural communities. 

For that reason, I am very much of an advocate of the system 

but do look forward to hearing from our witnesses today as to their 

perspectives on the adequacy of our current regulatory structure. 

With that, I recognize Mr. Kanjorski for an opening statement. 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

We meet today to discuss the regulation of the Federal Home 

Loan Banks. As you know, Mr. Chairman, I share your deep interest in these important financial institutions. After all, we worked 

closely together for several years to include language to reform the 

Federal Home Loan Banks during our deliberations over the 1999 

law to modernize the financial services industry. 

Among other things, these reforms strengthened the corporate 

governance of the Federal Home Loan Banks, updated their capital 

structure and established voluntary membership on equal terms 

and conditions for all eligible institutions. They also expanded access to the system for small community financial institutions. The 

changes additionally have helped to pave the way for enhanced targeted economic development lending. 

Although some of my colleagues may think the issue is a new 

one, we have debated how to best regulate the Federal Home Loan 

Banks for a number of years. Like the regulation of Fannie Mae 

and Freddie Mac, my goal has been to ensure that we have strong, 

world-class and independent regulation for the Federal Home Loan 

Banks. 

The current safety and soundness regulation of the Federal 

Home Loan Banks is actually better than that of the other government-sponsored enterprises. The Federal Housing Finance Board, 

unlike the Office of Federal Housing Enterprise Oversight, is funded outside of the congressional appropriations process. In addition, 

a previous survey by the Government Accounting Office determined 

that the Finance Board has powers that are substantially better 

than OFHEO’s authorities, because these authorities more closely 

align with those of the banking regulators. 

3

Because the Finance Board already has many of the powers that 

it needs and because the structure of the Federal Home Loan 

Banks is significantly different from the other housing GSEs, my 

preference continues to be to consider regulatory changes for these 

institutions on separate tracks from any regulatory reform bill for 

Fannie Mae and Freddie Mac. With its increased emphasis on safety and soundness supervision in recent years, the Finance Board 

has become increasingly more effective in monitoring the Federal 

Home Loan Banks. 

That said, I recognize that there is a strong push by some to incorporate the Federal Home Loan Banks into any forthcoming GSE 

reform bill. If we therefore do include the system in the regulatory 

overhaul, we need to ensure that such legislation will protect the 

unique nature of the Federal Home Loan Banks and not negatively 

affect the cost of funds. I also want to ensure that the system can 

continue to build on its community and economic development initiatives that we authorized 6 years ago. 

Another important concern for me is the need to ensure that an 

independent voice continues to be heard on the boards of the Federal Home Loan Banks. Public interest directors have an important 

role to play in corporate governance. Some of the reforms that we 

have enacted in recent years have gone too far in limiting the compensation that they can receive for their services. 

We need to increase the pay of directors in order to ensure that 

we can attract quality directors to serve on boards and effectively 

monitor sophisticated financial products and strategies. We ought 

to also increase the length of the term of all directors. Finally, we 

should ensure that directors are appointed in a timely manner. 

One final issue that I hope we will address today concerns registration with the Securities and Exchange Commission. Last year, 

the Finance Board approved a rule to require the banks to register 

their stock with the Commission, even though such stock is not 

publicly traded. The banks are now working toward implementing 

that plan. I do, however, have concerns about how such registration 

will interplay with the joint-and-several liability of the system. I 

therefore hope that our witnesses today will address this issue. 

In closing, Mr. Chairman, I commend you for your sustained 

leadership in these matters and look forward to hearing from our 

witnesses today. 

Chairman BAKER. Thank the gentleman for his statement. 

Mr. Barrett? 

Mr. Fitzpatrick? 

Mr. FITZPATRICK. Thank you, Chairman Baker. 

With the improper accounting practices at Fannie Mae and 

Freddie Mac, this committee has raised serious concerns about that 

adequacy of the current regulatory environment for housing-related 

government-sponsored enterprises. 

Despite being a new member of this committee, it is apparent to 

me that there is a great need to change the GSE’s regulatory structured. Legislative proposals have been introduced to create an independent regulatory, not only for Fannie Mae and Freddie Mac, but 

also for the Federal Home Loan Banks. 

In America, we have a great story to tell. The United States 

homeownership rate has reached a record 69.2 percent in the secVerDate 0ct 09 2002 10:04 Oct 17, 2005 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 G:\DOCS\23733.TXT FIN1 PsN: MICAH
4

ond quarter of 2004, and the number of homeowners in the United 

States reached 73.4 million—the most ever. And for the first time, 

the majority of minorities in America own their own homes, and 

this is also the experience in my district in southeastern Pennsylvania. 

Due to this success, we must ensure that GSE reform does not 

hinder the housing industry. The regulatory must be independent 

and have supervision and enforcement powers nearing those of federal banking regulators. The regulator also has to recognize that 

the Federal Home Loan Bank System has a different mission, 

structure and capital backing than Fannie Mae and Freddie Mac. 

Nonetheless, I believe that the benefits of a combined regulator 

would outweigh the costs. 

Ultimately, we must be certain that we are protecting the home 

buyer. These home buyers are the families of the 8th Congressional 

District of Pennsylvania. I need to know in what way housing-related GSE reform would affect their everyday lives before we proceed. 

I yield back my time, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. 

Mr. Frank? 

Mr. FRANK. Thank you, Mr. Chairman. 

I agree with much of what the gentleman from Pennsylvania, the 

ranking minority member of the subcommittee, had to say. If it 

were up to me, we would not be putting the Federal Home Loan 

Banks in with Fannie Mae and Freddie Mac. I accept the argument 

that I heard from many that market perception really forces us to 

do this. Namely, if we were not to include the Federal Home Loan 

Banks here, the market would misread this in some ways and 

there could be problems. 

I am drawing up a list, Mr. Chairman. This is an area, the question of receivership for Fannie Mae and Freddie Mac, how we treat 

stock options. I have a long list of things that we are being urged 

to do primarily because if we do not do them, the market will misread what we are doing. 

When I hear people preach to me the unerring intelligence of the 

market in general, I think about the number of occasions when this 

committee is pressed to do things because the market will get it 

wrong if we do not make some cosmetic changes, including the Federal Home Loan Banks in the same regulator with the GSEs is 

fairly cosmetic. They are different institutions, they will be regulated in different ways, but we will put them in the same overall 

box in the organization chart. That will apparently be of some comfort to investors, far be it for me to deny these people comfort. I 

just hope they will not take this as one more sign of their acuity. 

On the Federal Home Loan Banks, it is important that we not 

disrupt the system that seems to me to be working well, in particular. I was here when under the leadership of Henry Gonzalez, 

whose picture was there, we created, over bitter partisan opposition 

at the time, the Affordable Housing Program. It was a very close 

vote on the floor of the House of Representatives. Today, it is one 

of the few areas where we continue to make money available for 

the construction of subsidized housing. It has worked superbly. 

5

I am pleased to note that one of the later witnesses will be from 

Boston, Mr. Miller, from the Wainwright bank. The Wainwright 

bank has been a great example of a socially responsible institution, 

and we have benefited from the Affordable Housing Program. 

Housing has been very important in this country, economically 

and socially. The existence of 30-year fixed mortgages as a main 

option for a lot of people we must not jeopardize that. 

I would mention one specific point that I would hope we will deal 

with, and it deals with the Affordable Housing Program. The Affordable Housing Program dispenses funds as a percentage of 

where the activity has occurred, and it dispenses those funds—well 

it dispenses the funds according to the banks that are members of 

the particular regional bank. 

When we passed that in the eighties, mergers were not nearly 

the rage that they are today. The result is that today we have a 

lot more activity being conducted in one area but being credited because of a merger to another area, and that creates a disparity. 

The notion of the Affordable Housing Program was that money 

would be spent on affordable housing to some extent in the areas 

where the banks earned it. In Boston, now, we have had a couple 

of mergers, the Sovereign Bank-Compass Bank one in particular 

where an out-of-state bank, headquartered I believe in the Pittsburgh district, now does a lot of business in Boston. 

I am very grateful, both to the home loan bank system, the Pittsburgh and Boston banks and to Sovereign bank for some ad hoc arrangements that dealt with that, but I would hope we would find 

some systemic way that this does not have to reach the issue of 

multiple bank membership. What I would like to see is that for the 

Affordable Housing Program purposes we get a form of accounting 

so that the original purpose is not defeated by mergers and that 

economic activity in a particular area will generate money for affordable housing in that area. 

But, overall, I do not think that radical surgery of any sort is 

needed here, and I accept the fact that we will be doing an overall 

bill, and I hope that we will come out with something that looks, 

frankly, very much like what we now have with regard to the home 

loan banks. 

Chairman BAKER. I thank the gentleman and make the observation that if that affordable housing standard were made applicable 

to Fannie’s $900 billion investment portfolio, that could yield some 

real benefits. 

Mr. FRANK. If the gentleman would yield, as he knows, he is 

talking about something we have already been advocating. And in 

fact thanks to the Senator from Rhode Island, Mr. Reed, it was in 

the Senate bill, which would have passed if the administration did 

not pull the plug on it. And it is in every proposal that we have 

made, so we very much agree. 

And I would also point out to the gentleman that what we are 

doing, if he would just yield me 30 more seconds, the Affordable 

Housing Program is a percentage of the profits, which means—and 

I want to apply that to Fannie Mae and Freddie Mac. I want a percentage of what they do to go to affordable housing, which of course 

means that if you succeed in shrinking them, you will succeed in 

shrinking the amount that goes into affordable housing. 

6

Chairman BAKER. I thank the gentleman for his observations 

and agree. I think we actually could do both. I think we can increase the amount available to affordable housing, shrink their 

portfolio and everybody wins. 

Mr. FRANK. Well, I would just to the gentleman, if he would yield 

further since we are apparently debating the substance, you get a 

percentage, and the smaller their overall activity, the smaller the 

percentage, either of the affordable housing goals or of the profits 

that go along with the Affordable Housing Program. 

Chairman BAKER. Oh, I agree. I am just saying they do nothing 

now. We could certainly improve off nothing. 

Ms. Kelly? 

Mrs. KELLY. Thank you, Mr. Chairman. 

Believing in the ownership society, I fully support what the Federal Home Loan Banks have been doing in providing access to 

home ownership in various ways. I am concerned that with the bill 

that we are to do that we not create a dislocation in the housing 

market in any way. I think that is what my colleague was referring 

to. 

That said, I applaud what home loan banks have been doing, and 

I certainly look forward to the testimony of the witnesses today. 

I applaud you, Mr. Chairman, for holding this hearing so that we 

can actually hear from the people who are helping Americans own 

homes. 

I yield back. 

Chairman BAKER. Thank the gentlelady. 

Ms. Wasserman Schultz? 

Ms. WASSERMAN SCHULTZ. Thank you, Chairman Baker, Ranking 

Member Kanjorski and members of both panels. 

For the sake of time, I would like to limit my opening statement 

because I am eager to hear from the panelists, but I do want to 

express the concern that I know that many members have, that the 

public interest directors for the Federal Home Loan Banks have 

not been appointed. 

And what this decision has done is it has increased the risk for 

the corporate governance structure for the Federal Home Loan 

bank of Atlanta, specifically which serves the institutions that I 

represent in Florida. 

The three appointed directors of the bank, whose terms have expired, were among the board’s most experienced directors who possess special industry knowledge and expertise that added value to 

the governing ability of the bank’s board. 

Their vacancies leave $130 billion financial institution’s board 

operating without a newly elected chairman, and that deeply concerns me. 

Thank you. I yield back the balance of my time. 

Chairman BAKER. I thank the gentlelady. 

Mr. Castle, did you have a statement? Mr. Castle? Did you have 

a statement? 

Mr. Davis? 

Mr. DAVIS OF KENTUCKY. Thank you, Mr. Chairman. Housing 

issues are deeply personal to me. When I was a young child, our 

congressman cut through federal bureaucratic red tape to help my 

mom get our first house, and it changed our lives. I am looking forVerDate 0ct 09 2002 10:04 Oct 17, 2005 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 G:\DOCS\23733.TXT FIN1 PsN: MICAH
7

ward to this dialogue on goals and transition in the Federal Home 

Loan Banks, like our own excellent Cincinnati branch, and hope 

that it can continue to adapt to the markets and also provide a 

platform to help people transition into ownership. 

Thank you for being here. I yield back my time. 

Chairman BAKER. Thank the gentleman. 

Mr. Watt? 

Mr. Royce? 

Mr. ROYCE. Thank you, Mr. Chairman. I thank you for holding 

this hearing on GSE reform and the federal home loan bank System, and I would like to commend you again for your continued 

leadership on GSE oversight and reform. 

For some time, I have been a strong advocate of regulatory reform for all three housing GSEs: For Fannie Mae, Freddie Mac and 

the Federal Home Loan Bank System. In the last Congress, I proposed legislation to create a single regulator for all three entities, 

and in my view, this is the right policy because all three present 

similar risks to the financial system. 

Since unveiling my legislation in June of 2003, there have been 

numerous headlines about problems at all three housing GSEs. The 

accounting troubles at Fannie Mae and Freddie Mac seem to have 

overshadowed the issue in the Federal Home Loan Bank System, 

but in the past 2 years seven of the 12 Federal Home Loan Banks 

have been downgraded or put on negative watch by Standard & 

Poors. The S&P took these steps because of the increased interest 

rate risk and/or the decreased profitability at the seven banks. 

The interest rate risk in the Federal Home Loan Bank System 

has increased markedly as the individual banks have stepped up 

their purchases of mortgage assets. If managed improperly, this 

risk could put the entire safety and soundness of the system in 

jeopardy. 

I was pleased to read Chairman Rosenfeld’s prepared testimony 

in which he asserts that interest rate risk oversight is the Finance 

Board’s top priority. I encourage the Finance Board to be vigilant 

in this undertaking. 

In addition to our important oversight role in this committee, I 

hope that we will move swiftly to create a new regulatory structure 

for Fannie Mae and Freddie Mac and the Federal Home Loan 

Banks. There is a very simple solution: Congress must create a 

new regulator with powers at least equal to those of other financial 

regulators, such as the OCC or the Federal Reserve. 

I hope this committee will heed the advice coming from Chairman Greenspan, coming from the entire Board of Governors, coming from the Federal Reserve staff, the U.S. Treasury Department, 

the OECD, coming from the IMF and from countless others who 

have urged Congress to act. 

And, Mr. Chairman, thank you again for your leadership. I yield 

back. 

Chairman BAKER. I thank the gentleman for his statement and 

look forward to working with him on legislation yet to be considered. 

Mr. Feeney? There is no statement? 

Is there any other member desiring to make an opening statement? 

8

If not, at this time, I would turn to our first witness, the chairman of the Federal Housing Finance Board, the Honorable Ronald 

A. Rosenfeld. 

Welcome, sir, and you will need to pull that microphone down almost right in front of you. It is not very sensitive. 

STATEMENT OF HON. RONALD A. ROSENFELD, CHAIRMAN, 

FEDERAL HOUSING FINANCE BOARD 

Mr. ROSENFELD. Thank you, Chairman Baker, Ranking Member 

Kanjorski and members of the subcommittee. Today represents my 

first appearance before this subcommittee. I am honored to appear 

before you and to thank you for the opportunity to discuss the Federal Home Loan Bank System and reform of the government-sponsored enterprises. 

The opportunity to serve at the Finance Board is a great privilege. It has also been my privilege to work in the public sector at 

both the state and federal levels and most recently as president of 

Ginnie Mae. I have also spent a good part of my career in the real 

estate development and investment banking businesses. 

As chairman of the Finance Board, I testify today as a regulator 

who is committed to ensuring that the banks operate in a financially safe and sound manner, and carry out their housing finance 

mission. 

Mr. Chairman, I would like to begin by providing this subcommittee with an update on the banks’ registration with the SEC. 

The banks are required to file registration statements by no later 

than June 30, 2005 and to have their registrations effective by no 

later than August 29, 2005. The Finance Board staff has been 

working with the banks to ensure that registration is accomplished 

in a smooth and efficient manner. 

Over the past year, the Finance Board issued three advisory bulletins to the banks to help guide them through the registration 

process. To date, 11 of the banks have filed draft Form 10s with 

the SEC, and 10 of those banks have received comment letters 

from the SEC. 

On the supervisory front, last year, the Finance Board entered 

into two supervisory written agreements: One with the Federal 

Home Loan bank of Chicago and the other with the Federal Home 

Loan bank of Seattle. Under the written agreement, the Finance 

Board required the Seattle bank to hire independent third parties 

to conduct reviews of the board and management oversight and the 

bank’s risk management processes. Those reviews are under way. 

In considering its strategic alternative, the bank’s board of directors and senior management have decided to focus on the company’s traditional mission assets, called advances. This will likely 

include the development of an exit strategy for the Mortgage Purchase Program, which will enable the banks to lower its overall 

risk profile and reduce its operating cost structure. 

Previously, in June of 2004, the Finance Board entered into a 

written agreement with the Federal Home Loan bank of Chicago. 

Last month, the Finance Board accepted the bank’s 3-year business 

and capital plan. 

At the Finance Board, we are continuing to assess the performance and condition of these banks, and I can assure you that we 

9

will take whatever additional measures, if any, are needed to maintain the safety and soundness of each of the Federal Home Loan 

Banks and the system as a whole. 

Now, let me summarize briefly four key supervisory initiatives 

and priorities for 2005 and offer a brief comment on GSE reform. 

First, as noted, interest rate risk monitoring is at the top of our 

supervisory agenda. Interest rate risk is an inherent and significant risk facing the banks due to the nature of their business. 

Second, this year we initiated a program to visit each bank on 

a quarterly basis, between our annual on-site examinations. The 

visits give us an opportunity to follow up on examination issues 

and other developments. 

Third, we have directed our examiners to place increased emphasis on two essential elements of sound banking: Corporate governance and risk management. In addition, our examiners will continue to give close scrutiny to the accounting practices. 

And fourth, we intend to provide additional guidance with respect to the Affordable Housing Program. 

Finally, regarding the reform of the housing GSEs, there can be 

little debate over the need to have the very best supervision and 

regulation. On that, I suspect we can all agree. So, the issue comes 

down to whether there will be real GSE reform. 

Real GSE reform consists of equipping the regulator with the 

powers that are most critical to providing effective and thorough 

oversight. In my view, a regulator must have a complete arsenal 

of enforcement powers, including, but not limited to, freedom from 

the appropriations process, the authority to approve new business 

activities and receivership authority. As for the structure of the 

regulator, the administration has spoken in its 2006 budget, and 

there seems to be a clear consensus in favor of supporting the notion of one regulator. 

Chairman Baker, Ranking Member Kanjorski, and members of 

the subcommittee, thank you for this opportunity, and I am pleased 

to answer your questions. 

[The prepared statement of Hon. Ronald A. Rosenfeld can be 

found on page 89 in the appendix.] 

Chairman BAKER. Thank you very much, Mr. Chairman. I want 

to start with just a general observation and maybe a comment from 

you. 

Your authorities at the Finance Board in relation to those of the 

current Fannie and Freddie regulator, OFHEO, you can remove a 

bank officer or a director, place a bank into receivership, the ability 

unilaterally to address capital levels, even perhaps limit portfolio 

growth in a particular product or activity. Do you view those tools 

as essential to a regulator overseeing GSE activity? 

Mr. ROSENFELD. Chairman Baker, I believe that those tools are 

absolutely essential to effective regulation, and I would add that 

one of the reasons that I believe we at the Housing Finance Board 

have been and will continue to be a very effective regulator is the 

fact that we do have that complete arsenal of tools at our disposal. 

Chairman BAKER. So you would then, I presume, make the observation that if a single regulator is to be created, the regulator created for this new purpose should at least have the authorities curVerDate 0ct 09 2002 10:04 Oct 17, 2005 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 G:\DOCS\23733.TXT FIN1 PsN: MICAH
10

rently in the Federal Housing Finance Board and not the diminished powers granted currently to OFHEO. 

Mr. ROSENFELD. I certainly agree with you. Quite frankly, I am 

not sure whether in the list of powers that you articulated that you 

mentioned being free from the appropriation process. If you had 

not, that also is a very critical aspect. But I would concur with your 

statement. 

Chairman BAKER. With that addendum, certainly, I agree. 

There is one other point, which I think has not been discussed 

at great length. In questioning to Mr. Greenspan several weeks 

ago, I was concerned about the rate of growth at Fannie and 

Freddie, and we segued into the question of securitization. In your 

testimony, you made note of the fact the bank system does not 

securitize. 

It was in the early to mid-1990s Mr. Brendsel, then CEO of 

Freddie Mac, at that table, when asked by me about the advisability of then the growing MBS portfolio, as to the advisability in 

engaging in that practice, and at that time his view was, ‘‘That is 

enabling us to move certain business risks off our books to the 

market, and we look at it as a security device, enabling us to generate even more liquidity.’’

At the same time, he said in that day, ‘‘We would not conceive 

of repurchasing our own MBS back onto the books for the sake of 

enhanced profitability.’’ And of course that view appears to have 

changed significantly over time. 

If the bank system were to securitize and to issue MBS but be 

prohibited from repurchasing its own MBS, as a regulator, do you 

see that as an ill-advised path or have you given any consideration 

at this point? 

Mr. ROSENFELD. I think that that is certainly one option, and I 

think in order to answer the question let’s stipulate that a decision 

as to the ability to securitize has been made. I am not addressing 

the advisability of that, but we will stipulate that that is the case. 

I think if that is the case, we essentially have three options. One 

option is basically the Ginnie Mae model where Ginnie Mae provides a guarantee, collects a fee and goes home. That is all it does. 

The next model would be something which I think perhaps might 

be described as a variation of Alan Greenspan’s comments where 

the GSEs could purchase securities, their own included, but have 

a limitation on how much of those securities they can buy. And I 

suppose a third model would be essentially what we have now, at 

least in the case of Fannie and Freddie, where they purchase their 

own securities without a limit. 

Those are very important decisions, and, quite frankly, I think 

that the decision of which one of those three models is most appropriate is best left to the Congress. 

Chairman BAKER. And one other observation in my discussion 

with Mr. Frank about the limitation on portfolio growth, if we were 

to assess some arbitrary percentage against the earnings of that 

portfolio at the other two GSEs, similar to the Affordable Housing 

Program, my concern would be without a cap that would only fuel 

more growth as the entity attempts to offset the loss of that percentage with additional revenue to inure to the benefit of shareVerDate 0ct 09 2002 10:04 Oct 17, 2005 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 G:\DOCS\23733.TXT FIN1 PsN: MICAH
11

holders and a perverse incentive to see that portfolio’s growth rate 

even escalate unless there is some sort of cap. 

Chairman Greenspan did indicate in his comments that the cur- rent $1.6 trillion worth of portfolio holdings for both Fannie and 

Freddie do not have any nexus to facilitating home ownership. 

That being the case, if we do adopt some cap in light of their rate 

of growth, would you as a regulator feel that that cap is also appropriate for the bank system or would you feel as a regulator that 

that cap would also be appropriate for the bank system going forward? 

Mr. ROSENFELD. Well, certainly, that cap was not necessarily appropriate for—and I do not know what it would be, but it is not 

necessarily appropriate for the home loan banks. The notion of a 

cap, as such, to the extent that the Congress deems it appropriate, 

I think if it is applicable to Fannie and Freddie, would have a logical nexus to the home loan banks. 

I think in regard to your observation, and in response to Congressman Frank’s thoughts, I think that imposing additional tax 

might encourage an expanded portfolio. I think that is possible, but 

I think you have to keep in mind some fundamental differences between Fannie and Freddie and the home loan banks, one of which 

is that Fannie and Freddie are publicly held companies. Earnings 

per share are a very significant part of their interest. While there 

is an interest on the part of the home loan banks to earn profits, 

they simply do not have in the system the kinds of motivations in 

terms of earnings that exist with a publicly held company. 

Chairman BAKER. Thank you. I certainly have come to recently 

appreciate how earnings per share affect a lot of things over at 

Fannie. 

Mr. Kanjorski? 

Mr. KANJORSKI. Thank you, Mr. Chairman. 

Mr. Rosenfeld, just to keep the record straight, your opinion as 

to the safety and soundness of the system at this point in time, is 

there any reason for the Congress to be overly nervous about any 

of the Federal Home Loan Banks? 

Mr. ROSENFELD. No, sir. 

Mr. KANJORSKI. And would you say that as a result, even 

through some tough times in terms of a recession, they have come 

through rather well, but they have had to have corrective mechanisms put into place under the direction of the bank? 

Mr. ROSENFELD. Congressman, I believe that the safety and 

soundness of the home loan banks are well assured. I think the activities are in good hands, and I will tell you that as chairman of 

the Housing Finance Board, we are cognitive of our primary responsibility, which in fact is safety and soundness, and we intend 

to do what needs to be done. 

Mr. KANJORSKI. Well, I think there is a discussion, certainly, 

with myself and some of my other colleagues in terms of whether 

or not there should be one single regulator for Fannie Mae and 

Freddie Mac and the Federal Home Loan Banks. You have an opinion we should have a single regulator or are you somewhat similar 

to my thinking that the Federal Home Loan Banks are rather 

unique institutions doing rather unique things vis-a-vis Freddie 

Mac and Fannie Mae and therefore special understanding of the 

12

banks and their relationship to their stockholders, other banks, national banks, et cetera, demands a little bit more hands-on understanding of that difference? 

Mr. ROSENFELD. I think, Congressman, there are a number of 

issues that would end that question that I think I need to address. 

Number one, whatever is done from this day forth I think it is important that we recognize and the Congress recognizes the difference between Fannie and Freddie and the home loan bank system. As I said earlier, Fannie and Freddie are publicly held corporations, whereas the home loan bank system is a cooperative. 

There are a whole series of significant aspects that differentiate the 

two. Those differences must be respected. 

Today, the Federal Housing Finance Board is I think an extremely capable regulator for two reasons: Number one, we have 

very good people, and, number two, we have powers that Chairman 

Baker articulated. So between the people and the powers we, I 

think, are in an excellent position. 

If in fact it was determined by the Congress to go through with 

one regulator, assuming that the powers remain, we would not at 

all be impaired. But I would point out to you that—and there 

might be a certain amount of marginal benefit that we might pick 

up by some consolidation under one regulator. But even if we do 

not go to one regulator, I would assure you that as to the Federal 

Home Loan Banks they will continue to be very well regulated. 

I am not adverse to the one regulator. I think, as I said earlier, 

it is up to the Congress, and regardless of which way it goes, we 

will do what we need to do in a very appropriate way at the Housing Finance Board. 

Mr. KANJORSKI. While we are on that subject, I know you are 

just newly on board, but we have had some discussions ourselves 

on economic development and the use of the Federal Home Loan 

Banks as a tool toward probably bringing more money into the area 

and having it operate through a better filter system, local banks 

that utilize the lending services of the Federal Home Loan Bank 

System. 

Have you had the occasion to examine some of the tools that are 

down at the Finance Board to see whether or not we need a greater 

expandability to encourage more activity in the area of economic 

development and community development? 

Mr. ROSENFELD. I think, Congressman, we have the tools. The 

problem in that situation, which I share your views in this very important matter, the problems are really, I think, twofold. One is we 

have to, in effect, educate the bankers in the home loan bank system as to the desirability of making loans in those areas. The 

other, which perhaps is even more important, is we have to create 

a demand amongst borrowers for those kinds of loans. 

And I think at the end of the day the real challenge is to bring 

both sides together. We want to have bankers who are more receptive to making those kinds of loans, and we want to have more people asking for those kinds of loans. And I think at that point we 

will have some real success. But unless we do both, I think it will 

be very difficult to really make a meaningful contribution to what 

I know we want to contribute to. 

Mr. KANJORSKI. Thank you very much, Mr. Chairman. 

13

Chairman BAKER. I thank the gentleman. 

Mr. Barrett? 

Mr. BARRETT. Thank you, Mr. Chairman. 

Chairman Rosenfeld, thank you for being here today. It was 

great to talk to you the other day. Appreciate you taking some time 

with me. 

As you know, Chairman Oxley and Chairman Baker have been 

leaders on the issue of corporate governance, and because of that, 

a lot of committee members have questions regarding the current 

vacancies on appointed director positions at the Federal Home 

Loan Banks, and I am going to roll about four questions into one, 

so if you could help me out here. 

Currently, what is the status of the appointed director positions 

on the Federal Home Loan Banks boards? What options are being 

considered? What is the current plan and the course of action to 

fill these vacancies? And if you can give me some type of time 

frame, too, Mr. Chairman, I would greatly appreciate that. 

Mr. ROSENFELD. Congressman, people who I refer to as public interest directors are very important to the home loan bank system. 

Quite frankly, the historic way of selecting directors is probably inappropriate in the world that we live in today with the growth of 

the banks and the sophistication of the banks. I think historically 

selection for public interest directors tended to be in the nature of 

a thank you, an honorarium, a reward, something of that nature. 

In today’s world, that is simply inappropriate. These are very large, 

very complex institutions. 

And the challenge we have is to create a process that brings directors, public interest directors to the table who have the requisite 

knowledge and qualifications that are appropriate for the positions 

that they are filling. That is not easy to do for a variety of reasons, 

one of which is you have to define, based on every particular bank, 

what are there particular needs. They may have some very, very 

capable people and what you need in Cincinnati you do not necessarily need in Topeka. So one problem is, what do they need 

based on their particular situation? 

Another problem is currently there is a cap, a relatively modest 

cap for service on these boards, and I think that, quite frankly, although it is currently our statutory obligation to do so in terms of 

appointing directors, the Congress has looked at this and is considering at least in the Hagel bill that I have seen a couple of changes 

which I think are good. Number one, the selection of public interest 

directors would be made by the banks. Number two, the salary cap 

would be off. Number three, the terms would be extended from 3 

to 4 years, all of which I think are good. 

Now, I would point out we are not waiting—we cannot wait until 

Congress acts, but we are looking at how we can go about really 

creating a board that is appropriate for what is needed in the system today. 

And let me also add, the term, ‘‘public interest directors,’’ is I 

think in some respects used in the wrong way. Now, in the statute 

it is mentioned the public interest directors, which have something 

of a descriptive nature to them in terms of their background and 

qualifications. What I really think we are talking about here is outVerDate 0ct 09 2002 10:04 Oct 17, 2005 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 G:\DOCS\23733.TXT FIN1 PsN: MICAH
14

side directors. Within a subset of outside directors are public interest directors. 

But I think virtually all students of corporate governance would 

agree that a totally inside board is not effective. We would hardly 

concur with that. I think most students of corporate governance 

would agree that the regulator should not appoint the regulated, 

but that is where we are. 

As I said a moment ago, we are working on it. It is not easy in 

terms of time to get it done. I really cannot give you a definitive 

date, but I would certainly hope that it does not go on many more 

months. 

Mr. BARRETT. So short of legislation, I mean, there is no definitive plan, as we stand right now? 

Mr. ROSENFELD. We have not evolved to the point where saying 

that if you do not pass legislation we will do A, B, C, D. We have 

not gotten there yet. 

Mr. BARRETT. Okay. But you think you are getting closer? 

Mr. ROSENFELD. We are working on it. 

Mr. BARRETT. Okay. One last follow-up. And I understand where 

you are coming from that public interest directors, I mean, it is a 

different environment, it is a different world, but if we get the right 

person for the right job, you still believe that there is a place for 

public interest directors, Mr. Chairman? 

Mr. ROSENFELD. As a subset of outside directors. I think they are 

part of being an outside director. So the answer to your question 

is, yes. 

Mr. BARRETT. Thank you, Mr. Chairman. 

Thank you, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. 

Ms. Wasserman Schultz? 

Ms. WASSERMAN SCHULTZ. Thank you, Mr. Chairman. 

Mr. Rosenfeld, just to follow up on the question that the gentleman was just asking you, you originally extended the terms of 

the public interest directors by 6 months and then that was pulled 

back. Can you elaborate on why you initially felt that that was why 

and then subsequently that was not the direction that you went in? 

Mr. ROSENFELD. Yes, Congresswoman Wasserman Schultz. We 

had originally sought to hold over existing directors whose terms 

were expiring. We did that because we felt, as I think many of you 

feel, that a full complement of directors is desirable. In particular, 

I believe that of those directors whose terms were expiring, something like nine of them were either chairman or vice chairman of 

their boards, which are obviously positions of significance. We felt 

that if we were able to hold them over pending a clarification of 

what is really needed, that would be desirable. 

It was subsequently determined by the Justice Department, conveyed to White House counsel, that what we did was not within 

our legal authority, and having learned that, we rescinded the extension, and that is exactly what happened. 

Ms. WASSERMAN SCHULTZ. In the past when those openings occurred, how had that been handled? When an opening occurs, was 

there an automatic reappointment or was there a——

Mr. ROSENFELD. Congresswoman, I honestly do not know, not 

having been there. I know that in the short time I had been there, 

15

when I acted, there was an awful lot of letters that came in terms 

of people supporting one candidate or another, but I really do not 

know whether people were normally reappointed or not. I simply 

do not know. 

Ms. WASSERMAN SCHULTZ. How could it possibly be better public 

policy to leave those positions vacant for as long as they have been 

than to at least extend the terms of the——

Mr. ROSENFELD. But we could not extend the terms. The Justice 

Department came down and said we do not have the authority to 

extend the terms. I think what we did was preferable to reappointing somebody for what is a 3-year term and basically continue a process that we think is inappropriate for the governance 

of these banks. 

Ms. WASSERMAN SCHULTZ. But, essentially, now what the situation is, is that you have a very large ship without a captain. 

Mr. ROSENFELD. Well, you have a great many captains, a great 

many directors who remain in office, and I think that in most all 

the banks, the ones I have spoken to, and I think I have spoken 

to most, yes, it is true that many of the banks lost very talented 

directors, but many, many talented directors remain. So this is not 

a rudderless ship, let me assure you. 

First of all, all the member directors are still there, and I believe 

probably around two-thirds of the appointed directors are still 

there. So it is not without leadership. 

Ms. WASSERMAN SCHULTZ. But it appears obvious, though, that 

politics has been injected into the way that this is being handled 

this time as opposed to the previous instances where there were 

vacancies, and what I would like—if you do not know the answer 

to the question which I asked you, which was how has it been handled before, if you could have someone find out for me, because I 

am quite certain that the length of time that they have been left 

open has not been similar in the recent past. So if you could find 

out and have someone let me know, I would appreciate it. 

Mr. ROSENFELD. We will do so. Thank you. 

Ms. WASSERMAN SCHULTZ. Thank you. 

Chairman BAKER. The gentlelady’s time has expired. 

Mr. Fitzpatrick? 

Mr. FITZPATRICK. Thank you, Chairman Baker. I just have one 

question. 

Chairman Rosenfeld, by the way, thank you for your testimony. 

I found this very useful and very helpful. 

It was reported, I guess as a result of your filings for 2003, that 

the federal home loan bank had outstanding debt obligation of 

about $774 billion. Can you let us know, let the committee know 

how much of that debt was held by the United States versus foreign nations and also how much was held governmentally versus 

by private investors? 

Mr. ROSENFELD. Congressman, I do not know the answer to that 

question. We will have to get back to you. 

Mr. FITZPATRICK. Appreciate that. Thank you. 

Chairman BAKER. Thank the gentleman. 

Mr. Watt? 

Mr. WATT. Thank you, Mr. Chairman, and thank you, Mr. 

Rosenfeld for being here. 

16

Let me just ask a couple of questions about your testimony. Last 

year, year before last, a number of federal home loan bank officials 

started approaching me about their interest in more aggressively 

doing things that were similar to what Freddie and Fannie were 

doing. And when I investigated further and talked further there 

seemed to be a substantial division between the member banks 

about whether that was a good idea. And what initially had appeared to be a federal home loan bank position turned out to be 

the position of one or two of the member banks, not the whole system. 

I take it from your testimony on page two that some of the bank 

went more aggressively in the direction of doing the same kinds of 

things that Freddie and Fannie were doing. Is that what the Mortgage Purchase Program was, a reflection of that, or am I missing 

something here? 

Mr. ROSENFELD. In a very general sense, I would answer yes, but 

it is only partially similar to what Fannie Mae has done. 

Mr. WATT. I know I am——

Mr. ROSENFELD. They are different in some very significant 

ways. 

Mr. WATT.——oversimplifying this to some extent, but does the 

comment, the last sentence at the bottom of page two of your testimony, ‘‘This will likely include the development of an exit strategy 

for the Mortgage Purchase Program,’’ is that a reflection that a decision basically has been made to go back to a more traditional approach and portfolio of activities by the home loan banks than the 

attitude that seemed to be floating around 2 or 3 years ago? 

Mr. ROSENFELD. Congressman Watt, that is an excellent question, and the answer is that that is a decision by the board of the 

Seattle Bank. That is not a decision of the Federal Housing Finance Board; we have not made that decision. And, quite frankly, 

I think that the decision that what the other 11 banks do in the 

system are going to be up to the directors of those institutions. 

That is clearly a significant decision for Seattle, but it applies only 

to Seattle. 

Mr. WATT. And to what extent are the other banks kind of out 

there doing those kinds of things similar to a Mortgage Purchase 

Program? 

Mr. ROSENFELD. Well, the biggest participant in that general 

type of activity is the Home Loan Bank of Chicago, which is substantially more involved in it than Seattle was. I think it is three 

or four times larger in terms of the size of the program. 

A number of the other banks are involved in that program on 

something of a lesser basis than Seattle, and there are a couple of 

banks who are not involved in it at all. 

Mr. WATT. And has Chicago had more success with it than Seattle? I mean, have they exposed themselves to the same kind of 

problems? 

Mr. ROSENFELD. Well, in the context of both being under a written regulatory agreement, they have both had problems, but I 

think that it is fair to say in deference to Chicago that the extent 

of the economic reality of their participation has been more successful than Seattle has been. 

Mr. WATT. They made better business decisions——

17

Mr. ROSENFELD. To date. To date. 

Mr. WATT.——and management decisions than Seattle. 

Mr. ROSENFELD. To date. But, again, I would emphasize that 

both are under regulatory agreements. 

Mr. WATT. Okay. 

Mr. ROSENFELD. Which is not where you want to be if you are 

in the banking business. 

Mr. WATT. All right. What is the Finance Board’s attitude toward—or maybe—I am new to this subcommittee, so I am kind of 

feeling my way. 

Mr. ROSENFELD. I am new to the Finance Board. 

Mr. WATT. Well, then we may be like the blind leading the blind, 

as they say. 

Chairman BAKER. That will be the gentleman’s last question, because his time is getting——

Mr. WATT. I am just trying to figure out whether the Finance 

Board has a general attitude about whether it is desirable to be in 

Mortgage Purchase Programs, such as Chicago and Seattle have 

been involved in, or is there a position that the Finance Board has 

taken? 

Mr. ROSENFELD. Our position, Congressman Watt, is that we are 

safety and soundness regulators. That is our number one priority. 

We also want to ensure that the banks operate within their mission of providing housing finance and community investment 

needs. We have not made nor perhaps will not make a definitive 

judgment as to the mortgage programs. 

I think that we look at them from the perspective of safety and 

soundness, and to the extent that their activities jeopardize safety 

and soundness, we will act accordingly. And that is really the 

framework in which we look at these things. We do not look in a 

theological or philosophical sense. 

Mr. WATT. Thank you, Mr. Chairman. 

Chairman BAKER. Gentleman’s time has expired. 

Mr. Davis? 

Mr. DAVIS OF KENTUCKY. Thank you, Mr. Chairman. 

As the federal home loan bank is adapting to changes in the 

marketplace as the economy continues to transform, I was wondering if you are looking at new products or processes to address 

risk and also give your clients and your members more options. 

To that end, I was wondering if you might comment on the discussion about the ability to securitize mortgages, which has been 

proposed as a way to reduce interest risks at the banks? And in 

your opinion, do you believe that the banks should be allowed to 

issue or guarantee mortgage-backed securities in a capital market 

that are conforming mortgages owned by the banks or their members? 

Mr. ROSENFELD. I think, Congressman, it is important that in 

answering that question we define what securitization means, and 

let me define what I believe it means, at least in the context of my 

answer. I believe it means the issuing of mortgage-backed securities by a federal home loan bank which carries the joint and several liability of the Federal Home Loan Bank System. Such a development would represent a significant departure from the current 

structure and practices of the home loan bank. That departure is 

18

so significant, in our judgment, that it should only be undertaken 

at the direction of the Congress. 

I am sorry, was there another——

Mr. DAVIS OF KENTUCKY. No. So from that perspective, you are 

against that. 

Mr. ROSENFELD. No, I am not against it. What I said is that the 

decision to securitize, in the context I defined it, should be left to 

the Congress. That is a very different activity than historically has 

been performed by the home loan banks. 

Mr. DAVIS OF KENTUCKY. Would your personal view be to keep 

it in the more traditional vein where it has been as opposed to 

where Fannie Mae has gone? 

Mr. ROSENFELD. Congressman, I really do defer to the Congress. 

I do not have a strong personal opinion. 

Mr. DAVIS OF KENTUCKY. Okay. Thank you, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. 

Ms. Velazquez? 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman Rosenfeld, it is my understanding that the current Affordable Housing Program the board oversee subsidizes the cost of 

housing for low-income, owner-occupied and rental housing. With 

regards to rental housing specifically, Affordable Housing Program 

subsidies support housing in which at least 20 percent of units will 

be affordable for very low-income households at or below 50 percent 

of the area median income. 

Given that there is a shortage of affordable rental housing, some 

communities, like those in my district, are exploring opportunities 

to set aside a small chunk, 30 or 40 percent of units, for low-income 

families in order to meet the demand for housing. 

What are your thoughts on the banks reaching more families by 

increasing the Affordable Housing Program to 30 or 40 percent of 

units and serving poorer families by lowering the area median income maximum to 40 or 30 percent? 

Mr. ROSENFELD. Congresswoman, I am afraid I must answer you 

in a generality, because I simply do not have the knowledge or 

facts to answer you specifically as to the questions you are asking 

me. As a general proposition, we would certainly like to see the Affordable Housing Program expanded to help those people who need 

it. 

Given the reality that when you give more to one group you take 

from another because the total is fixed, I think part of our challenge, and for that matter part of your challenge, is to make those 

very tough calls as to what we do. I will try to get back to you on 

the specifics and perhaps lay out some of the issues involved in 

what you are suggesting, but, unfortunately, I just cannot respond 

to you today. 

Ms. VELAZQUEZ. Well, I would appreciate if you sent to us a written response. But at some point or another, we need to look at the 

crisis that we are facing in this country, especially in urban centers, including rural America regarding affordable housing. 

Mr. ROSENFELD. I agree. 

Ms. VELAZQUEZ. Chairman, the issue of limiting Federal Home 

Loan Banks’ members’ use of advances has come up in the recent 

debate about whether to include the banks in GSE reform. It is my 

19

understanding to advances to members is a significant part of the 

banks’ business. Can you comment on the potential effects of limiting the use of advances by federal home loan bank members? 

Mr. ROSENFELD. I am not aware of any discussion about limiting 

advances by the home loan banks, unless I——

Ms. VELAZQUEZ. This is an issue that has been raised by some 

of your lenders, including the ones from New York. 

Mr. ROSENFELD. Congresswoman, I have not heard about limiting advances. 

Ms. VELAZQUEZ. Okay. Thank you very much. 

Chairman BAKER. I thank the gentlelady. 

Mr. Feeney? 

Mr. FEENEY. Thank you, Mr. Chairman, and thank you, Mr. 

Rosenfeld. 

You talked a lot about supervision and oversight and regulation. 

I am interested in the capital structure of the home loan banks and 

your oversight of it. Gramm-Leach-Bliley mandated that the capital 

structure be changed for these banks. What is the status of the 

banks’ implementation of these new capital plans, and what is the 

average percentage leverage of capital in the relative amount of 6-

month and 5-year maturity stock in the system, to your knowledge? 

Mr. ROSENFELD. To my knowledge, 10 of the 12 banks have completed their capital plans under Gramm-Leach-Bliley. I am sorry, 

I did not hear the rest of your——

Mr. FEENEY. What is the average percentage of leverage capital 

in the amount of 6-month and 5-year maturity stock in the system, 

if you know? 

Mr. ROSENFELD. Well, the minimum leverage capital is, I believe, 

4 percent. Some banks have higher. I cannot tell you the average. 

I certainly will get back to you on that. 

Mr. FEENEY. Okay. I think that would be helpful. And which two 

banks have not yet fully implemented the capital plan? 

Mr. ROSENFELD. I am going to have to get back to you on that, 

sir. 

Mr. FEENEY. Okay. In 2003, the Federal Home Loan Banks had about $775 billion worth of outstanding debt. Do you know how 

much is held by U.S. as opposed to foreign investors of that debt? 

Mr. ROSENFELD. That question was asked a few moments ago. I 

did not know it then, and I still do not know. 

Mr. FEENEY. All right. Okay. Sorry, I was out of the room for a 

minute. 

Mr. ROSENFELD. I understand. 

Mr. FEENEY. But I am interested in the capital structure, and if 

you can answer those questions for us, I would be grateful. 

Mr. ROSENFELD. We will, sir. Thank you. 

Mr. FEENEY. With that, I will yield back the balance of my time. 

Thank you, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. 

Mr. Meeks? 

Mr. MEEKS. Thank you, Mr. Chairman. 

Mr. Chairman, I am going to try to get some clarification. I know 

as of last June the FHFB decided to require the FHLBs to register 

a class of equity securities under the 1934 act. And I have no problem with greater protection of our financial system, but I am not 

20

clear on what the benefits are. The FHLBs issued debt securities, 

and they are not owned by the public but by their members, and 

so I was wondering if you could explain to me more clearly the benefit of having them register and whether or not the member banks 

are not receiving enough information on their own FHLBs that 

they own? 

Mr. ROSENFELD. Congressman, I think that there are a couple of 

benefits to registration with the SEC, although I certainly will acknowledge that I was not there when the debate took place. But 

the home loan bank system is a very significant issues of debt, and 

I believe that the public is better served by complete openness and 

candor in terms of the status of organizations that issue debt, publicly held debt. And I think in today’s world greater disclosure, 

given a choice, is clearly the way to go. 

Another factor, another benefit that I think is prevalent—or 

present, I should say, is the fact that the disciplines involved in 

registering with the SEC tend to provide for better management of 

an organization. I have spent most of my life, quite frankly, in the 

private sector, partially in a family owned business, partially with 

a public company. I will tell you that being part of a public company is much more onerous, it is much more difficult and challenging and aggravating in terms of the registration requirements. 

But it also makes you a better company because it forces you to 

do things that you might not do if you were not required to do it. 

Mr. MEEKS. I am trying to also conceptualize in my head and ensure that the separate legal and operational characteristics of the 

Federal Home Loan Banks are maintained and not lost in an agency that would also regulate the other two much larger GSEs. I 

think that is important. 

Now, the question then comes in, the day-to-day decisions, the 

everyday supervisory decisions between the deputy director as opposed to the director will do. Would the director be established as 

more of an agency administrator who will review the actions of the 

deputy director who may then focus in more on and interpret some 

of the regulatory decisions that are affecting the GSEs? How do 

you see that? How do you see that we can make sure we maintain 

the differences between the Federal Home Loan Banks and Fannie 

and Freddie Mac? 

Mr. ROSENFELD. Well, I think everybody who is knowledgeable 

acknowledges the fact that Fannie and Freddie and the home loan 

banks are very different. 

Mr. MEEKS. I see. 

Mr. ROSENFELD. I have no idea how this is going to turn out and 

what the ultimate structure is going to be or who is going to be in 

what position, but I have to believe that anybody who would come 

into a position of responsibility in the oversight of the home loan 

banks would very quickly learn that the system is not broke and 

if it ain’t broke, do not fix it, because it does not need to be fixed. 

And I simply cannot imagine that people would come in and try to 

materially change what is fundamentally a very, very well run, 

well disciplined safety and soundness regulator. So, quite frankly, 

I am really not terribly concerned about that. 

Mr. MEEKS. Thank you. 

Yield back, Mr. Chairman. 

21

Chairman BAKER. Mr. Royce? 

Mr. ROYCE. Thank you. Thank you, Mr. Chairman. 

And, Chairman Rosenfeld, I would like to preface my questions 

by giving the following safe harbor, and that is I do not believe the 

Federal Home Loan Bank System is on the brink of failure, but as 

this committee considers legislation, we need to prepare for all scenarios. 

And so my first question, I want to get your thoughts about receivership in the Federal Home Loan Bank System. Currently, the 

12 banks are jointly and severally liable for the senior debt obligations of each banks. Those bonds carry triple A ratings. This means 

that if one bank were to default on its bond payments, the bond 

holder would be made whole by the other 11 banks, correct? 

Mr. ROSENFELD. Correct. 

Mr. ROYCE. However, the individual banks also enter into derivatives contracts with counterparties to hedge interest rate risk. Not 

all individual banks have triple A counterparty ratings. In the 

event of a failure at one of the banks, how would counterparty contracts be handled? Does joint and several liability apply to derivatives contracts in these cases? 

Mr. ROSENFELD. It is my understanding that they do not. 

Mr. ROYCE. They do not. Well, the Federal Home Loan Bank System is in a very unique situation, because we have got 12 member 

banks with close to $1 trillion in assets. You are convinced that the 

argument of joint and several liability does not make one bank liable for the actions of the other 11 banks in some instances but it 

does in others. But better regulation and SEC registration help to 

protect the system. Do you believe that the 12 banks should be required to share more detailed information with one another as an 

additional protection to the system, given the joint and several liability argument? 

Mr. ROSENFELD. Congressman, I believe that the 12 banks 

should be given the option of sharing more information with each 

other. I am hesitant to use the word, ‘‘require,’’ because you can 

perhaps get into areas that it may be inappropriate to share. And 

I think, quite frankly, we are headed in that direction. I know our 

general counsel has been meeting with the general counsel of the 

various home loan banks exploring mechanisms for the sharing of 

information. I think that the fundamental track that your question 

is on I think is a very important one. 

Mr. ROYCE. Don’t you think it would guarantee some measure of 

additional protection if that information were shared? 

Mr. ROSENFELD. I agree with you that if more information was 

shared, that would provide some greater degree of protection. 

Mr. ROYCE. And as you say, internally they are working on a 

methodology to encourage sharing, although not mandated; is 

that——

Mr. ROSENFELD. That is correct. 

Mr. ROYCE.——your understanding? 

Mr. ROSENFELD. That is correct. 

Mr. ROYCE. If it were mandated, do you think there would be 

even further protection to the overall system? 

Mr. ROSENFELD. I think it depends on what is mandated. I think 

that if you—I suppose you could go so far as to require things that 

22

would actually jeopardize the system, but that is why I think a voluntary approach is—and the human pressures that come from that 

kind of environment I think would probably do the trick. 

Mr. ROYCE. Chairman Rosenfeld, thank you very much. 

Chairman BAKER. Thank the gentleman. 

Mr. Davis? 

Mr. DAVIS OF ALABAMA. Thank you, Mr. Chairman. 

Chairman Rosenfeld, good afternoon to you. Let me pick up, if I 

can, on the questions that Mr. Watt was raising to you earlier. One 

of the things that was interesting to me as I listened to your colloquy with him you were talking about the evaluation the Finance 

Board will make as to whether home loan banks should move into 

the secondary market. You talked about the fact that you all have 

not reached a decision or a consensus yet as a board on whether 

or not that is an advisable course for home loan banks. 

I want to ask you about that, but what was interesting about 

that colloquy to me is that it raises an interesting contrast I want 

to get your reaction to. As you know, we are, as a Congress, and 

this committee in particular, very much considering the new regulatory structure, not just for the home loan banks, potentially, but 

for the other GSEs. Fannie and Freddie, and one of the points of 

contention has been whether or not new programs or new activities, even, should be given a high level of scrutiny and be subjected 

to advanced approval by a regulator. 

Now, if I am understanding your testimony correctly, the Finance Board does not require advanced approval of whether or not 

a bank goes into the secondary market. If a bank makes a decision 

to do that, it can do that; is that correct? 

Mr. ROSENFELD. If you mean we have to approve the selling of 

assets in the normal course of the business, the answer is no. 

Mr. DAVIS OF ALABAMA. And, again, I understand that whether 

or not it is a good practice for home loan banks to move into a secondary market, I understand that is under evaluation, but what is 

interesting to me is that under a regulatory structure that you just 

said has worked very well, and I agree with you, it has worked 

very well, the Finance Board does not require that kind of advanced approval of home loan banks, but yet there are some members of the committee who do believe that there ought to be a high 

level of review for new programs or activities on the part of Fannie 

or Freddie. Does that strike you as a contradiction? 

Mr. ROSENFELD. No, not really. I think that, again, Fannie and 

Freddie is really not on my plate. 

Mr. DAVIS OF ALABAMA. But you do take my point that obviously 

new programs and new activities requiring a level of advanced 

scrutiny of that seems fairly intrusive, and it raises the question 

to me is shouldn’t we learn something from the home loan banks? 

Obviously, the home loan bank does not appear to be nearly as intrusive in terms of what it inspects regarding its member banks, 

and it seems to work very well, doesn’t it? 

Mr. ROSENFELD. I think we are intrusive where intrusion makes 

sense. 

Mr. DAVIS OF ALABAMA. But you have not found an intrusion 

makes sense in the context of advanced regiments by secondary 

mortgage. So, again, I am not trying to debate you on the subject, 

23

I am just trying to get a general reaction. That, to someone who 

is a layman—I have included myself in that category—seems like 

something of a contradiction. If it has worked well for the Federal 

Home Loan Banks to allow the home loan banks to make as basic 

a decision as whether to go into the secondary market, maybe that 

tells us something about whether or not it is exactly necessary or 

healthy. 

Mr. ROSENFELD. Congressman, let me be very clear, and perhaps 

I misstated a moment ago: In terms of selling loans in the secondary market, that would require our approval. I was addressing 

the issue of just generally buying and selling assets, which they do 

every day. But in terms of selling mortgages in the secondary market would require our approval. 

Mr. DAVIS OF ALABAMA. Okay. But what about the specific chorus of whether or not home loan banks ought to be engaging in 

that practice, as a general rule, what Mr. Watt was asking you 

about earlier? Is there a consensus on the Finance Board that it 

is a good or bad practice for member banks to be entering the secondary market? 

Mr. ROSENFELD. I think you have to look at the particular situation. Let me leave aside the issue of securitization, which is a 

whole other category, as I tried to define it earlier. But the mere 

act of selling mortgages into a secondary market may or may not 

be appropriate. It depends upon the circumstances of that bank 

and what——

Mr. DAVIS OF ALABAMA. And that is a decision the bank would 

make. 

Mr. ROSENFELD. Subject to our approval. 

Mr. DAVIS OF ALABAMA. Okay. Subject to your approval. 

Mr. ROSENFELD. Right. I am sorry, going back to Fannie and 

Freddie. 

Mr. DAVIS OF ALABAMA. Well, I was just trying to make a basic 

comparison, one of the major points of controversy around Fannie 

and Freddie is whether or not when they engaged in new activity 

or new programs there ought be a level of advanced scrutiny by the 

regulator, whoever the regulator turns out to be. And what I am 

simply trying to do is to ask you whether or not there is a difference or whether there is an appropriate difference between your 

regulatory authority and the level of regulatory authority that is 

being proposed for Fannie and Freddie? 

Mr. ROSENFELD. Well, I think that Fannie and Freddie exist pursuant to essentially a contract and a charter, and I think that they 

have been given certain benefits in exchange for certain restraints, 

limits as to what they could do, and I think it is appropriate that 

whatever they are undertaking be viewed in the context of the contract that they entered into. 

I think in the case of the home loan banks I think there is an 

element of that, but I think we are in a somewhat different situation. 

Mr. DAVIS OF ALABAMA. I think my time has expired, Mr. Chairman. 

Chairman BAKER. The gentleman’s time has expired. 

Mr. Scott? 

Mr. SCOTT. Yes. Thank you, Chairman Baker. 

24

Chairman Rosenfeld, let me ask you a few questions about safety 

and soundness, which, as I understand it, is one of your primary 

responsibilities that you are charged with ensuring that each of the 

12 Federal Home Loan Banks operate in a safe and sound manner. 

What is the status of the comprehensive accounting review of the 

banks, and are there any preliminary findings that you could share 

with this committee? 

Mr. ROSENFELD. First of all, Congressman, let me tell you that, 

in effect, there are two important activities going on, one of which, 

of course, as I mentioned on a number of occasions, the SEC registration. That is moving along in a very quick fashion, and we intend for the banks to complete their work as scheduled. 

We have also said in the past, and we will reiterate, that we 

want the accounting of these home loan banks to be absolutely appropriate, given the various FASB rules and regulations. And we 

said that we would do whatever needs to be done to ensure that 

would occur. 

We, to date, quite frankly, have not begun a specific activity in 

terms of a special accounting review. If in fact we determine as 

time goes by that the need for that sort of thing is in fact appropriate, I assure you we will do it. And if that becomes in conflict 

with the SEC registration somehow, we will deal with that when 

the time occurs. 

I would point out to you, however, as we sit here, I am not aware 

of anything that exists in any of the banks that would suggest that 

there is an issue that needs to be corrected. 

Mr. SCOTT. When the SEC registration process of the home loan 

banks stops, has there been any problems? 

Mr. ROSENFELD. Well, I think there are always problems when 

people are asked to do something comprehensive and new. So I 

would describe it as more nits and gnats as opposed to major substantive problems. 

Mr. SCOTT. Should, in your opinion, a single financial institution, 

any single financial institution be permitted to have a relationship 

with more than one federal home loan bank? 

Mr. ROSENFELD. Well, that question is I think most frequently 

put in the context of, what do you think about multidistrict membership. It is the opinion of our counsel, our general counsel, that 

we at the Finance Board do not have the authority to authorize 

multidistrict membership. I suppose one could shop around and get 

another opinion someplace, but at to end of the day, that, to me, 

much like securitization, is an issue that goes to the very core of 

the creation of the home loan bank system and quite frankly 

should be determined by the Congress. 

Mr. SCOTT. Now, should home loan banks be allowed to issue or 

guarantee mortgage-backed securities by conforming mortgages 

owned by the Federal Home Loan Banks or their members? 

Mr. ROSENFELD. I did not get the last part. 

Mr. SCOTT. Should home loan banks be allowed to issue or guarantee mortgage-backed securities by conforming mortgages owned 

by the Federal Home Loan Banks or any of their institutional 

members? 

Mr. ROSENFELD. I assume, Congressman, you are asking me the 

question about securitization, unless I am wrong. I mentioned earVerDate 0ct 09 2002 10:04 Oct 17, 2005 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 G:\DOCS\23733.TXT FIN1 PsN: MICAH
25

lier that I think securitization, which would mean the issuance of 

mortgage-backed securities that are backed by the joint and several 

liability of the home loan bank system, I think the decision to do 

that ought to be left to the Congress. 

Mr. SCOTT. Thank you. 

Chairman BAKER. Thank you, Mr. Scott. 

Mr. Miller? 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. 

Currently, the federal home loan bank has a single regulator for 

both mission oversight and safety and soundness, different than 

Freddie and Fannie. Freddie, they have one for safety and soundness and the other one for a different mission. What can we learn 

from FHLBs compared to Freddie and Fannie as it applies to looking to preserve the housing mission while ensuring safety and 

soundness at the same time? 

Mr. ROSENFELD. I am sorry, could you——

Mr. MILLER OF CALIFORNIA. Well, your structure has a single 

oversight, whereas Freddie and Fannie have a double. Can you 

compare the two, and what should we look to to preserving the 

mission of Freddie and Fannie as it applies to housing? 

Mr. ROSENFELD. Well, I think that we at the Finance Board have 

virtually all the requisite powers we need in terms of being a safety 

and soundness regulator to assure that the banks are operated in 

a safe and sound way and fulfill their mission. 

I think, and, again, I am by no means a student of the OFHEO 

rules and regulations, but it is fairly apparent that they did not 

have the same tools that we had. I think the best way to assure 

that Fannie and Freddie meet their housing mission is to make 

sure that they are operated in a safe and sound fashion, which 

means the regulator has to have the right tools. I think if they operate in a safe and sound fashion, I see no reason to believe that 

their commitment or their mission would not be achieved. 

Mr. MILLER OF CALIFORNIA. can you give me the pros and cons 

to each approach, all that you see out there, separating regulators 

versus separating single regulators—the single versus the separate, 

having two versus one? 

Mr. ROSENFELD. Yes. I think that the reasons for doing it, as a 

practical matter, may be—if that is the route to get appropriate 

governance over Fannie and Freddie, then that is probably a route 

you ought to go. That just may be the way to do it. A couple of the 

advantages of doing that is I think that there would be some enhanced expertise, particularly in the area of which management by 

having a larger organization. I think there may be some economies 

of scale in terms of the administration and so on. 

I think that in terms of perception, and I am not sure how significant it is, but I think there is an argument that perceptions 

amongst the investment community would be that both carry the 

same kind of a quality in terms of their securities as opposed to 

one being perhaps a stepsister. So those I think are all benefits. 

The negatives, quite frankly, are not negatives, in my opinion, 

providing that whoever is in charge recognizes that Fannie and 

Freddie and the home loan banks are really quite different and not 

only recognize it but respects the difference and governs in a manner that is respectful of those conditions. As I said earlier, there 

26

is no question in my mind the Finance Board regulatory structure 

today is first rate, and if we went to one regulatory, it would continue to be first rate, providing it would be left alone and its talents and skills were respected. 

Mr. MILLER OF CALIFORNIA. We are looking at breaking up where 

HUD has currently had oversight to have two separate ones: One 

for fiscal oversight and one for programmatic. The problem I am 

having is when you shift programmatic away from HUD, who I believe has expertise, that I am concerned could create a problem because when you are dealing with programmatic, as you know, 

many of the programs out there change products from day to day 

to try to meet the demands of the industry. What do you think 

about that? 

I mean, I think HUD has expertise and they have proven that 

historically to continue to have oversight of the programmatic side 

and possibly coming in on the fiscal side with——

Mr. ROSENFELD. I think, Congressman, you have to recognize 

that HUD as a place does not have expertise. HUD as a place that 

has people who are experts has expertise. 

Mr. MILLER OF CALIFORNIA. Correct. 

Mr. ROSENFELD. And I think if you take——

Mr. MILLER OF CALIFORNIA. But you could say Congress does not 

have expertise, it is the individuals within Congress who have the 

expertise. 

Mr. ROSENFELD. If you take the people who are at HUD or take 

others who are very knowledgeable and put them in another building, that expertise would be there too. 

Mr. MILLER OF CALIFORNIA. But what do you accomplish? All you 

are doing is creating a name change. That is my concern. If we are 

going to take the same people that have the ability to continue programmatic oversight, as they have in the past, and you shift people 

to a different room, yes, I would agree with you, but is that what 

we are doing? I mean, that is my concern, that we might be shifting authority away from HUD and yet not moving the people who 

have the oversight capability to move with that. 

Mr. ROSENFELD. Congressman, I——

Mr. MILLER OF CALIFORNIA. That is a difficult question. 

Mr. ROSENFELD. With all due respect, that part of what is proposed I have simply not considered. It is an interesting question. 

I do not know the answer. 

Mr. MILLER OF CALIFORNIA. Okay. I think my time has expired. 

Thank you, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. 

Mr. Rosenfeld, I just wanted to come back, given the diversity of 

questions you have responded to this morning, and make some general observations. The Federal Housing Finance Board operates as 

a unitary regulatory in the sense of safety and soundness and mission compliance. In response to the question the gentleman from 

Alabama, Mr. Davis, relative to product approval, with regard to 

MPP and MPF, you had to get prior approval as opposed to HUD 

who has to stop the practice of Fannie and Freddie once having entered into the market. 

In my knowledge of the matter, it has never been brought to my 

attention where HUD has ever turned down a product of Fannie 

27

or Freddie. I would consider that to be fairly significant evidence 

that nobody gets it right 100 percent of the time. My wife has 

pointed that out to me. 

The point being that you have broad unilateral authority to act. 

There is a clear receivership provision. You have the unilateral 

right to adjust capital, as you deem appropriate in the public interest. You can limit their portfolio growth. All of these matters considered and aggregated has not in any way adversely affected the 

bank system’s ability to enter the capital markets and acquire capital needed for its business purposes. Is that correct? 

Mr. ROSENFELD. That is true. 

Chairman BAKER. And in fact when we look at your operations, 

you are subject to a 20 percent net operating profit by district to 

meet your REFCOR obligations, a 10 percent net profit for affordable housing, so, essentially, one-third of your net operating profits 

is allocated by government requirements to specific purposes. That 

does not seem to be an inhibition to the successful operation of the 

bank system. 

The point is that those who have been opponents of reform for 

Fannie and Freddie have missed the lessons the bank system has 

clearly demonstrated, that all of these regulatory constraints have 

resulted in a better system which performs at a higher level of social mission compliance than Fannie or Freddie. In fact, most commercial banks have more loans in their portfolio to low-and moderate-income individuals than Fannie and Freddie have in their 

portfolio. And few commercial banks can match up with the bank 

system’s record of performance in that arena. 

Now, not to sound like I am in the first row of church at the 

bank system, I have got one problem and I do not know that there 

is a good answer to it. One of the distorting effects, I think, in the 

market from a bank system perspective is the consolidated debt obligation and Banker X’s ability to borrow, in essence, on Bank Y’s 

credit. I am not suggesting today, make clear, that we revocate the 

consolidated debt obligation structure, but I do believe there should 

be market discipline, in addition to the regulator’s function, in evaluation district banks’ creditworthiness in some capacity, whether it 

is some subordinated issue, whether there is a requirement—some 

vehicle where we require a district to issue debt on its own bottom 

for the market to respond to the managerial and supervisory issues 

within that district. 

Has there been any discussion or is that even an area which the 

board has entered into or has concerns about? 

Mr. ROSENFELD. We have concerns, Chairman Baker, that all of 

the banks operate to the very highest credit quality standards that 

is possible. We have not explored the notion, to my knowledge, of 

changing the idea of consolidated obligations, but I think that consolidated obligations from everybody’s perspective is better served 

if each one of the components in the consolidation are triple A. So 

I think we are working——

Chairman BAKER. Well, let me help in a little way. Here is my 

point, and I appreciate your method of governance, I appreciate 

your team oversight, but you are not dictating as a finance board 

what products a bank might engage in, for example the MPP Program. What you do, as I understand it, is once the product is develVerDate 0ct 09 2002 10:04 Oct 17, 2005 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 G:\DOCS\23733.TXT FIN1 PsN: MICAH
28

oped, you assess the risk-taking nature of that product and determine if it is too risky, if it is sufficiently hedged, if the capital is 

adequate, but you do not tell a bank, ‘‘You can do A or you cannot 

do B.’’

Mr. ROSENFELD. We do, Congressman. In a sense, a program like 

that—it happened before I ever was there—but it has to be approved by the Finance Board. 

Chairman BAKER. Right, but——

Mr. ROSENFELD. And once it is approved, then we monitor it and 

make sure that it does not get out of line in terms of what is appropriate for safety and soundness. 

Chairman BAKER. Right, but as I am understanding the supervisory role it is to look at the practice and determine if it is sufficiently walled off from a risk-taking perspective, not to represent 

a clear and present danger to the financial solvency of the institution. But you do not write district banks’ business plans; they write 

their business plans and come to you and say, ‘‘Here is what we 

want to do. Is this okay?’’ And from a safety and soundness perspective you say, ‘‘We like it, but we are going to keep an eye on 

you.’’ I got that part. 

But each bank can get out there on the risk profile in different 

ways based on their own creativity and innovation of their staff. I 

am suggesting that strong regulation is not only warranted but 

necessary, but I would really like just an added dose of market discipline in there somewhere. And the bank system, as you have 

noted, a little unique in that regard as a member-owned structure, 

other than the issuance of debt into the market, we do not have 

the kind of discipline that a Fannie or Freddie would have in the 

day-to-day trading of a recognized liquid stock, and that is really 

what I am getting at. 

Mr. ROSENFELD. I understand and I agree, and I would point out, 

Chairman Baker, that we love all of our bank presidents but we 

also watch them. 

Chairman BAKER. I like the old trust but verify myself. I want 

to thank you. 

Mr. Baca, did you——

Mr. BACA. Sure, I would like to ask a question. 

Thank you very much, Mr. Chairman. 

Recently, the Federal Housing Financial Board approved a rule 

that would require the Federal Home Loan Banks to register stock 

with SEC to allow for increase in disclosures. Would you predict 

that as a result of that that SEC would ever take a rule like that 

it has taken with Fannie Mae in investigating the financials of the 

Federal Home Loan Banks? 

Mr. ROSENFELD. I could never predict what another organization 

would do, but my guess is if they thought that there was a need 

for it, they would do it. 

Mr. BACA. The only thing is that I want due process to be done 

on both as well. 

The other question, at least one home loan bank, the Seattle 

Bank, has decided to exit mortgage purchases business asserting 

that it is too risky. Do you think that the Federal Home Loan 

Banks should be in this business? 

29

Mr. ROSENFELD. I think that we all acknowledge that the mortgage programs or managing interest rate risk, which is another 

way of describing the mortgage programs, is intrinsically a highrisk business. It is just the nature of what it is. I think that having 

said that, that does not mean that the activity is intrinsically bad. 

We are looking very carefully at the appropriateness of the activity 

as well as the extent of the activity. And like so many other things 

in life, the answer may be in moderation. 

I cannot say to you the program is totally good in an unbounded 

way nor can I tell you that it is totally bad, and we are looking 

as to what might be the appropriate way to deal with that program. We are very concerned about it. I know the banks are concerned about it. And it is very high on our priority list of coming 

to some resolution as to just what happens with that program. 

Mr. BACA. Bottom line is should they be in this business or not? 

Mr. ROSENFELD. Cannot tell you at the moment. The best way 

I can describe it to you is, at some level the risk does not jeopardize 

safety and soundness. At the other extreme, I can assure you that 

if it got big enough, safety and soundness could be jeopardized, and 

that would be intolerable from our standpoint. 

Mr. BACA. Okay. Thank you very much. 

Chairman BAKER. The gentleman yields back? 

Mr. BACA. I yield back. 

Chairman BAKER. Mr. Frank. 

Mr. FRANK. Thank you, Mr. Chairman. I have a question, but 

first I did want to comment, Mr. Chairman, that I think frankly 

you set out kind of a straw man when you said people who are opposed to reform of Fannie and Freddie, which I think you mean 

people who do not like your bill, do not understand that affordable 

housing can be helped. Quite the contrary is the case, and really 

let’s get the record clear here. 

This administration, which has been very critical of Fannie and 

Freddie, let an entire calendar year go by in which they had the 

authority to increase the affordable housing goals and did not exercise it, because they inherited 2 years of increased goals from the 

previous administration and in the third year they could have, in 

the second year of their administration, increased the goals. We 

asked Mr. Weichert about it and by the time he got around to it 

it was too late, and when we asked why they had not done it, they 

said they forgot. 

I welcome the new interest in affordable housing in Fannie and 

Freddie, but I have to say that it does seem to me in some cases 

to be more a stick that people want to beat them with than something they want to accomplish. 

And with regard to an affordable housing program, I am glad to 

see the enormous support for the Affordable Housing Program. I 

was here in 1987 when it was a two-vote victory on the floor of the 

House in a very partisan vote, which created the Affordable Housing Program, and I am glad that people have now accepted the fact 

on both sides of the aisle that it should be there. 

But I also want to point out when we were doing legislation on 

Fannie Mae and Freddie Mac last year, it was those of us who you 

have characterized as being opposed to reform who came up with 

the idea and pushed it legislatively to make the Affordable Housing 

30

Program something they would have to do. Certainly, that is the 

way it went in the Senate. There was an amendment by Senator 

Jack Reed, and we were strongly supportive of it. 

So quite the contrary is the case, and in fact many of us believe 

that some of the proposals that are affecting Fannie and Freddie 

would have too much of an adverse effect on them. We can differ 

about those, but any suggestion that people who are on the other 

side of you have not been trying to increase affordable housing I 

think is exactly the opposite of the case. 

And on the affordable housing, and that is the thing that greatly 

interests me, and we have talked about this before and I mentioned 

it earlier and I had to go off to another meeting, but I did want 

to touch on what I think was your willingness to work with us. 

We can find a way without getting to the controversial issue of 

multiple memberships by one institution and several regional 

banks to try and deal with the problem created by mergers whereby economic activity that is generated by member banks in a particular area could get credited for purposes of the Affordable Housing Program to another region. And to the extent that we can work 

out some kind of proportionality, I just want to affirm that that is 

something that we think we can do without interfering with the 

overall function. 

Chairman BAKER. Congressman, immediately after I got back to 

my office after visiting with you, I said to the gentleman actually 

behind me that I was visiting with you and you came up with an 

issue here that I thought was extraordinarily meritorious, and I assure you we are working that issue right now. We share your concerns. 

Mr. FRANK. As I said, I want to pay tribute to the banks, the 

Pittsburgh and Boston Banks and the Sovereign Bank for trying 

to—essentially, what happened is Sovereign buys up a very active 

thrift operation in Massachusetts, and I think they worked out a 

deal where the Boston Bank will be able, in effect, to lend out the 

money with the agreement of the Pittsburgh Bank. And if we make 

that available to everybody, I think that would be very helpful. 

Chairman BAKER. Incidentally, there is no prohibition against 

different home loan banks working out such an agreement. What 

we are trying to do is create some opportunities to facilitate those 

kinds of——

Mr. FRANK. Okay. Let me just offer this, and I would hope this 

would be something we could do. If it turns out by the time we get 

to legislating on this that something we could do could facilitate 

that, not necessarily in a mandatory way but sometimes there is 

an unintended consequence of some other provision, I will count on 

you to let us know so that we can leave you in a legal situation 

where you can fully take the action. Thank you. 

Thank you, Mr. Chairman. 

Chairman BAKER. If the gentleman would just further yield, I 

just want to make sure that there is not an appearance of a split 

or a chasm here between the gentleman’s views and that of my 

own with regard to affordable housing. I have publicly stated that 

the gentleman’s views on affordable housing goals are desirable 

and should be included in any legislative approach that this committee should consider. 

31

Just in past years, not speaking directly to the gentleman, I 

could not get past the safety and soundness issue which I thought 

were so important to get to affordable housing. I think now in the 

window in which we are finding ourselves that safety and soundness and affordable housing can be mutually addressed and I think 

achieve the goals the gentleman——

Mr. FRANK. Well, Mr. Chairman, I am delighted you have made 

that passage, and I welcome you. 

Chairman BAKER. Well, I would point out that I was somewhat 

involved in the Federal Home Loan Bank System’s Design and 

Modernization Act of 1999 and have always been an advocate, but 

it is difficult to advocate when the money is not there to meet the 

goal. And my concern has been that the charter privileges granted 

to the large enterprises were being utilized to supply significant 

rate of return to shareholders and not meet their social obligation. 

And that historically has been there. So I just want to make sure 

everybody out there knows you and I are together. 

Is there any other member wishing to make a statement. If 

not——

Mr. FRANK. I am sure, Mr. Chairman, that will comfort them as 

they leave. 

Chairman BAKER. Yes. I can see the calm sweeping across the 

face of the earth. 

Mr. Chairman, I want to express my appreciation for your appearance here today, your strong leadership and direction, and we 

look forward to working with you in the future. 

Mr. ROSENFELD. Thank you, sir. 

Chairman BAKER. Thank you. 

And if I may ask the members of our second panel to come forward as they can. 

I want to welcome each of you to our hearing this morning, and 

just as to the general practice of the committee, your formal statement will be made part of the record. You will be recognized in 

order to present a summary of your views, and we request that you 

try to constrain yourselves to within a 5-minute presentation. 

And for the purposes of making our initial introduction, I would 

like to recognize Mr. Davis who has a word to say. 

Mr. Davis? 

Mr. DAVIS OF KENTUCKY. Thank you, Chairman Baker. This 

morning I would like to welcome to the subcommittee a constituent 

of mine residing in Kentucky’s fourth district, Dr. David Hehman, 

who is president and CEO of the Federal Home Loan Bank of Cincinnati, a regional wholesale bank serving 750 member financial 

institutions in Ohio, Kentucky and Tennessee. Dr. Hehman oversees the operations of the $83 billion federal 

home loan bank, including its multimillion dollar Affordable Housing Program that has created over 31,200 units of affordable housing in the region. He was named president and CEO in 2003 following a 25-year career at the bank in Cincinnati, during which he 

held positions including chief financial officer and executive vice 

president. 

In addition to these duties at the bank in Cincinnati, Dr. 

Hehman serves on the Finance Committee and Public Policy and 

Outreach Committee of the Federal Home Loan Bank President’s 

32

Conference and also represents the Federal Home Loan Bank of 

Cincinnati on the board, the Council of Federal Home Loan Banks 

and Pentegra’s Retirement Fund. 

I am also pleased to report that outside his duties with the bank, 

Dr. Hehman serves on the board of directors of Brighton Properties, Incorporated, a non-profit affordable housing and social 

services agency in my district in northern Kentucky, and he is a 

regionally recognized advocate working to increase opportunities 

for home ownership. 

Thank you for being here this morning, Dr. Hehman. We look 

forward to hearing your testimony, and I yield back to you, Chairman Baker. 

Chairman BAKER. I thank the gentleman for his comments, and 

at this time Mr. Frank also wishes to be recognized to make a brief 

opening statement. 

Mr. FRANK. Thank you for your graciousness, Mr. Chairman. 

I am delighted Mr. Jan Miller, who is the president and CEO of 

Wainwright Bank in Boston is here. The Wainwright Bank has 

been an extraordinarily creative, socially responsible bank, and I 

particularly wanted to note that, because among the projects in 

which they have worked on affordable housing was one in which 

my mother was very active. It is a very creative program providing 

aid to homeless women, a group very much neglected. So I am very 

appreciative of Wainwright for showing how profitability and social 

responsibility combine, and I thank Mr. Miller for being here. 

And I also thank him for his testimony because I often sit and 

listen or read people’s testimony and at the end of that have no 

idea what they think about the relevant issues, and I have learned 

a lot about their views on life but none of which help me. On pages 

four and five, he has a series of bullets, very specifically, talking 

about what as both from the bank and a member of the board of 

directors, the Boston Bank, very specific policy recommendations, 

positively and negatively. I appreciate those. I find myself very persuaded by them. 

But I thank him both for the nature of the testimony and for 

coming, and I appreciate, Mr. Chairman, your letting us do this. 

Chairman BAKER. Certainly. 

I would now turn to Mr. David Hehman, president and CEO of 

Federal Home Loan Bank of Cincinnati. Welcome, sir. 

Mr. HEHMAN. Thank you, Mr. Chairman, and thank you to Congressman——

Chairman BAKER. You will have to hit the button and then pull 

it close too. 

Mr. HEHMAN. Can you hear me? 

Chairman BAKER. There we are. 

STATEMENT OF DAVID H. HEHMAN, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, FEDERAL HOME LOAN BANK OF CINCINNATI 

Mr. HEHMAN. Sorry. Thank you, Mr. Chairman. I would also like 

to thank Congressman Davis for those kind words. 

Mr. Chairman, Ranking Member Kanjorski and members of the 

committee, I do appreciate the opportunity to speak to you today 

on behalf of the Council of Federal Home Loan Banks. 

33

Mr. Chairman, I would like to commend you for your commitment and hard work to create a truly world class regulator for the 

GSEs. 

And, Congressman Kanjorski, we commend you on your strong 

support of the system over the years and your support and your efforts toward strong corporate governance within the system. 

As you have heard today, the home loan bank system is quite 

unique, comprised of 12 regional banks with over 8,000 member institutions. And while the system shares a congressional charter 

and housing mission with Fannie Mae and Freddie Mac, the banks 

are fundamentally different. 

Our structure is one of 12 regional banks and their members 

that form a cooperative that is driven by member credit demand 

without the earnings pressure of a publicly traded stock corporation. And while the 12 banks are independently owned and operated, as you know, they share joint and several liability for the system’s debt. 

I think the mission perspective in the system is also broader 

than that of the other housing GSEs. The home loan banks are 

major providers of advanced funding for housing and community 

development. The value of these advanced systems goes from their 

daily availability as well as the actual provision of long-term funding at capital market rates. 

Recent research sponsored by the council into the impact of federal home bank advancements on mortgage lending has clearly 

shown that members of the system hold a significantly higher 

share of their assets in housing and community development loans 

compared to non-members. These findings actually confirm those in 

a July 2002 study sponsored by the Federal Reserve Bank of Cleveland, Ohio. 

These studies show a strong correlation between the use of advances and members’ willingness and ability to hold mortgage-related assets. Quite simply, the studies confirm the system is doing 

exactly what the work that Congress had intended. 

Two critical pieces of legislation have shaped the home loan 

banks today. First, of course, is FIRREA of 1989, which expanded 

membership to include commercial banks and credit unions, established the resolution funding assessment on bank earnings as well 

as mandated the Affordable Housing Program. As a result of the 

AHP program, the home loan banks since 1990 have awarded over 

$2 billion to create more than 400,000 units of affordable housing 

throughout the United States. 

Title VI of the Gramm-Leach-Bliley Act, sponsored by Congressmen Baker and Kanjorski, provided a permanent capital structure, 

expanded the types of collateral community institutions can pledge 

and also increased the independent corporate governance of each 

bank. 

The task of creating permanent capital is nearing completion, as 

10 of the 12 banks are now finished with their capital plan. These 

new structures have left the system with some $42 billion worth 

of capital and an aggregate capital asset ration of 4.5 percent. 

You have also heard that the Federal Housing Finance Board 

has recently adopted a final rule regarding each federal home loan 

bank and the requirement to register a class of equity securities 

34

with the SEC. Under this disclosure, the Federal Home Loan 

Banks will file their financial statements with the SEC. While the 

system already has in place a comprehensive reporting system, furnishing SEC reports will further the process of providing transparent statements by which the public can judge the activities of 

the system. 

Last year, recognizing there were serious legislative efforts to reform regulation of the GSEs, the Council of Federal Home Loan 

Banks adopted guiding principles for such legislation. With respect 

to the Federal Home Loan Banks, we believe these same principles 

should apply to regulatory reform under consideration by the current Congress. 

First, we believe it is critical that the legislation preserve the 

Federal Home Loan Banks’ mission of providing cost-effective funding to members for use in housing finance and community development. And that legislation should continue to encourage regional 

affordable housing programs. 

Second, it is critical that the legislation provide for a strong independent regulator. In addition, this new regulator must be given 

all the tools and authority necessary to ensure that Federal Home 

Loan Banks’ advanced mortgage programs operate in a safe and 

sound manner that is consistent with our mission. 

Third, it is critical that the legislation preserve the role and function of the Office of Finance, as they are the office that obviously 

is involved with the issuance of our debt. Legislation must ensure 

that neither the U.S. Treasury nor the independent regulatory unit 

has the ability to impede or limit the Federal Home Loan Banks’ 

access to capital markets without cause. 

Fourth, it is critical that the new regulatory structure recognize 

the unique regional characteristics of the system, including corporate governance at the local level. 

Mr. Chairman, the Council of Federal Home Loan Banks supports legislative efforts to achieve a world-class regulatory for the 

GSEs. From the point of view of the Federal Home Loan Banks, 

we believe it is important to resolve this matter promptly. 

Thank you for the opportunity to address the committee, and I 

would be happy to answer questions at the appropriate time. 

[The prepared statement of David H. Hehman can be found on 

page 67 in the appendix.] 

Chairman BAKER. Thank you very much. 

Our next witness is Mr. F. Weller Meyer, president and CEO of 

Acacia Federal Savings Bank. Welcome. 

STATEMENT OF F. WELLER MEYER, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, ACACIA FEDERAL SAVINGS BANK 

Mr. MEYER. Good morning, Chairman Baker, Ranking Member 

Kanjorski and members of the subcommittee. My name is Weller 

Meyer, and I am the president and CEO of Acacia Federal Savings 

Bank. 

Acacia is a $995 million community bank in Falls Church, Virginia. Acacia’s primary business is originating mortgages for families. We are a member of the Federal Home Loan Bank of Atlanta 

and currently have $244.1 million of advances outstanding. That is 

26.7 percent of our liability. We rely on the Federal Home Loan 

35

Bank System day in and day out to help us do our mortgage lending business. 

Community banks have an acknowledged history of superior performance in lending to low-income and minority borrowers and 

first-time home buyers. The Federal Home Loan Banks support 

this business with advances and with programs, including the Affordable Housing Program. These activities would not be possible 

without access to advances. 

From a member and user perspective, it is important to retain 

the highly successful cooperative organization of the system and 

the ability of the Federal Home Loan Banks to fund the mortgage 

originations and community development activities of its member 

institutions. 

Like many other banks, Acacia’s investment in federal home loan 

bank stock is the single largest investment we have. The safe and 

sound operation of the banks and the safety of my investment are 

critical. Although Acacia is a member of the Federal Home Loan 

Bank of Atlanta, the organizational structure and the joint and 

several liability of the banks mean that I am interested in all the 

activities of all the federal home loan banks. 

The Federal Home Loan Bank System needs a strong, independent regulator that has the authority to supervise the individual banks using the current statutory framework of powers. Any 

new regulator of the Federal Home Loan Banks must have the authority to maintain the banks’ access to the capital markets and 

their current well-defined mission to support the mortgage finance, 

affordable housing and community development activities of member banks. 

In the past 10 years, acquired member asset programs have been 

developed by several banks to provide the members and the banks 

that participate an alternative risk management and mortgage 

funding strategy. The members are able to sell loans to the Federal 

Home Loan Bank under terms established in the program. 

As the programs evolve, some market participants have discussed permitting securitization of the loans as part of the program. I strongly believe that this is a topic that must be studied 

before any action is taken, and that securitization be considered 

only in the context of a public review process conducted by the designated federal regulator. 

The independence of the future regulator is an important element. A structure that provides autonomy will insulate the regulator from concerns about unintended political influence. Fees that 

the regulator assesses the Federal Home Loan Banks must be used 

only to examine and supervise the banks. 

The Finance Board has powers and authorities similar to those 

of the banking regulators in the areas of capital activities and supervision, and they should be preserved. 

The Federal Home Loan Banks’ stocks and debt instruments 

should be subject to transparent disclosures that are appropriate 

for the unique GSE. In June 2004, the Finance Board issued a final 

rule requiring that each federal home loan bank register a class of 

securities with the SEC under the Securities Exchange Act of 1934. 

The disclosure scheme that has been established for public compaVerDate 0ct 09 2002 10:04 Oct 17, 2005 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 G:\DOCS\23733.TXT FIN1 PsN: MICAH
36

nies contains a number of requirements that make it difficult for 

a cooperative system to comply. 

I support the inclusion of certain specific securities law exemptions in any legislation. Such exemptions will make it easier for the 

Federal Home Loan Banks to register and to comply with the disclosure requirements but will also make it easier for interested parties to understand the disclosures and the business of the Federal 

Home Loan Banks. 

In particular, I support a specific provision that would exempt 

the Federal Home Loan Banks in the system from certain requirements of SEC’s Regulation FD. I believe that the composition of the 

boards of each of the Federal Home Loan Banks is a critical element in ensuring that the governance of the Federal Home Loan 

Banks is undertaken in an appropriate manner. 

Financial business and operating expertise must be demonstrated by the board of each federal home loan bank. I support 

careful consideration of changes to the statute, regulations and 

practice that will ensure that each federal home loan bank will 

have a board that is composed of members with a stake in the system, who understand the commitment and importance of serving 

on the Federal Home Loan Bank Board. 

I wish to again express my appreciation, Chairman Baker, for 

this opportunity to testify on this important issue. The future of 

the Federal Home Loan Bank System is important to the day-today operations of many community banks, including Acacia, and 

the communities they serve. 

I look forward to working with you and the members of this subcommittee as the legislative process unfolds. 

[The prepared statement of F. Weller Meyer can be found on 

page 76 in the appendix.] 

Chairman BAKER. Thank you very much, sir. 

Our next witness is Mr. Jan Miller, president and CEO of Wainwright Bank. 

Welcome, sir. 

STATEMENT OF JAN MILLER, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, WAINWRIGHT BANK 

Mr. J. MILLER. Thank you, Mr. Chairman. I would also like to 

thank Congressman Frank for his kind words. The project that he 

described is one of the most enjoyable that we have done. 

As I said, my name is Jan Miller, and I am president and CEO 

of Wainwright Bank and Trust Company in Boston, and I also 

serve as an elected director on the Board of the Federal Home Loan 

Bank of Boston. 

Wainwright is a $750 million socially responsible commercial 

community bank with 9 branches throughout the Boston metropolitan area. The bank’s progressive agenda includes a commitment to 

affordable housing, community development, social justice, environmental issues, women’s rights and the gay and lesbian community. 

It is our commitment to affordable housing and community development that is the cornerstone of our organization. We have provided more than $400 million in financing for these projects over 

the past decade. 

37

Currently, approximately 40 percent of our commercial loan portfolio is dedicated to community development and non-profit lending, including homeless shelters, special needs housing, food banks, 

AIDS housing and services, breast cancer research, land preservation, community health centers and other service organizations. 

I ran for a seat on the Boston Bank’s board, because the Federal 

Home Loan Banks are a critical partner for community banks like 

Wainwright. We rely on the Federal Home Loan Bank of Boston as 

a vital source of liquidity and asset liability management. But 

equally important, the Boston Bank has been enormously helpful 

in our efforts to address the needs of affordable housing in the extremely dense, high-cost metropolitan Boston area. Each federal 

home loan bank commits 10 percent of its net profits to the Affordable Housing Program, which awards grants and subsidized below 

market rate loans to fund affordable housing developments for the 

very low, low and moderate income individual and families. 

Wainwright has been fortunate enough to win funding for 24 of 

these such projects. We simply could not have funded these developments, which resulted in 775 units of much needed housing, 

without the nearly $6 million in AHP grants and $12 million in 

subsidized advances. 

Whether it is transforming an empty school into affordable assisted living for the elderly or creating first-time home ownership 

opportunities for hard-working families or providing quality housing for special needs populations, the homeless and the disabled, 

the Affordable Housing Program has been an important vehicle to 

help Wainwright fulfill its mission and strengthen our community. 

The Federal Home Loan Banks are as relevant today as they 

were when Congress created the bank system back in 1932. But if 

the members of the subcommittee believe it is important for this 

nation to have diverse, locally based financial institutions serving 

our communities and not just a handful of very large banks, then 

it is vital that we keep the Federal Home Loan Bank System 

strong and vibrant. 

Moreover, if you believe, as I do, that private financial institutions have a key role in addressing the need for affordable housing 

across the nation, the Federal Home Loan Banks are critical. 

Congress is wise to establish the bank system as a regionalbased cooperative. The Federal Home Loan Banks are well-positioned to meet the unique needs of multifaceted communities 

across our nation. The housing and community development finance needs could be quite different in New England than those 

you might find in Chairman Baker’s district in Louisiana or in 

Pennsylvania or in other areas of the country. 

The local federal home loan bank knows the laws and local regulations and also the people in the public sector and who to turn to 

for assistance when the project needs help. They are attune to any 

changes or any new requirements. The people at the Federal Home 

Loan Bank of Boston are committed to affordable housing and become our partner in the projects that we finance. 

The Affordable Housing Advisory Council brings members of the 

housing community together frequently to discuss issues, the 

bank’s programs and the needs within the region. It is my belief 

38

that the bank system would not be nearly as effective if it were a 

one-size-fits all operation. 

The directors of the Boston Bank have considered at some length 

the potential for reforming the regulatory structure for the Federal 

Home Loan Banks, along with Fannie Mae and Freddie Mac. As 

a director and a shareholder, I support having a strong and respected regulator for the Federal Home Loan Banks. The Boston 

Bank, as a member of the Council of Federal Home Loan Banks, 

supports the guiding principles of legislative reform, as Mr. 

Hehman has described in his testimony. 

More specifically, the Board of Directors of the Boston Bank believe that any GSE reform legislation should have the following elements: The new regulator must be independent outside of the Department of Treasury and dedicate a separate division to oversee 

the Federal Home Loan Banks; independent directors must continue to be appointed to the boards to maintain representation of 

the public interest. 

Finally, the Boston Bank would strongly oppose the following in 

any GSE reform legislation: Efforts aimed at minimizing the bank’s 

current GSE status, any efforts to foster consolidation, the imposition of additional financial burdens on the banks. As cooperatives, 

we already operate on very thin margins. 

We believe the Federal Housing Finance Board has sufficient authority to oversee the safety and soundness of the system’s Mortgage Purchase Programs and thus would oppose any limits placed 

on these programs by legislation, limits placed on large members’ 

access to the banks or any restrictions on board governance granted in Gramm-Leach-Bliley. 

Mr. Chairman, I appreciate the opportunity to testify this morning. On behalf of Wainwright Bank and the Federal Home Loan 

Bank of Boston, I look forward to working with you and your colleagues to craft a sound and thoughtful regulatory structure for the 

Federal Home Loan Banks. 

[The prepared statement of Jan Miller can be found on page 83 

in the appendix.] 

Chairman BAKER. I thank the gentleman. 

Our next witness is Mr. Joseph F. Conners, the executive vice 

president and chief financial officer of Beneficial Savings Bank. 

Welcome. 

STATEMENT OF JOSEPH F. CONNERS, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, BENEFICIAL SAVINGS BANK 

Mr. CONNERS. Thank you, Mr. Chairman, and thanks for the opportunity to come before the subcommittee today to talk about the 

vital role that the federal home loan bank plays in helping Beneficial and other community banks meet the housing and community 

credit needs of local communities. 

I am Joe Conners. I am at Beneficial Savings Bank. We are a 

Philadelphia bank with about $2 billion in assets and 36 branch offices spread throughout the city and its suburbs. Within those suburbs we do have offices located in the districts of two subcommittee 

members, Representatives Fitzpatrick and Gerlach. 

39

I want to just talk a little bit about the bank itself and history 

of the bank, because I think there is a reasonable parallel to some 

of the important issues that are affecting the home loan bank right 

now. 

Beneficial was founded over 150 years ago to serve the underserved. It was founded as a mutual or cooperative company. It remains a mutual cooperative company today, and it was also founded to serve the needs of a local area or a regional market, much 

like the 12 different Federal Home Loan Banks do in their regions. 

Essentially, the history is that in the 1850s waves of immigrants 

came from Europe due to the potato famine in Ireland as well as 

unrest and revolution in other parts of central Europe. Philadelphia being the major port city was a recipient of a lot of these immigrants as they came seeking a better life. 

They worked hard, they earned money, and they needed a place 

to save their money. The banks, the commercial banks at that time 

were not designed for working men and women. They were really 

there to serve the wealthy business people that were their primary 

backers. As the earnings of these wealthy people accumulated, they 

needed a place to stash their savings, and they went to the church. 

The local parish priests became their bankers and took their savings, put them in drawers in the basement of the church, and as 

they savings began to accumulate there were some concerns about 

security. These concerns were shared by the bishop of Philadelphia 

at the time, a fellow named John Newman and through his inspiration a group of businessmen got together and formed Beneficial 

Mutual Savings Bank in 1853. 

Bishop Newman, just so you know, subsequently was canonized 

by the Catholic church as a saint, so we do like to say we are the 

only bank in the country, maybe in the world, that actually was 

founded by saint. 

[Laughter.] 

Now, as I said, the bank was founded as a mutual company, it 

remains that way today, which basically means that we pay no 

dividends, we have no shareholders to please, there is no public 

stock outstanding. That means the bank can really focus its energies on its community and its customers. And we think that is very 

similar to the mission and to the actual operations of the Federal 

Home Loan Banks. 

Today, the Federal Home Loan Bank of Pittsburgh, of which 

Beneficial is a member, along with about 341 other member owners, helps us to meet the credit needs of the community. As is the 

case with a vast majority of federal home loan bank members, Beneficial is not large enough. To access the broadest range of capital 

markets activities and options to raise money to fund our operations. 

The Home Loan Bank of Pittsburgh enables Beneficial to essentially tap global capital markets without having the in-house expertise and resources that a major money center bank would need to 

have. It allows Beneficial to borrow from the home loan bank at 

reasonably attractive rates. It is a cooperative, so it adds only a 

small markup which we can then pass along to our customers in 

the form of reasonably attractive rates for their housing needs and 

other credit needs. 

40

The knowledge that we can borrow at any time from the home 

loan bank, and that our mortgage loans and other eligible collateral 

will support the bank’s funding, allows us to be more active lenders 

than we otherwise would be. The liquidity that is provided by the 

federal home loan bank is very important in allowing us to be able 

to fund our customers’ needs on a daily basis. 

For example, with the economy expanding, as it has been and 

continue strong demand for new housing, Beneficial has recently, 

in the last year or 2, begun using federal home loan bank advances 

to support construction of new housing in the area, as well as rehabilitation and renovation of existing units in urban neighborhoods 

and in suburban communities. 

Our customers are developers, they are looking for money short 

term that floats, that they can pay back whenever they want and 

that they can draw down whenever they want. The way we can 

structure these borrowings with the Federal Home Loan Banks allows us to meet those needs in almost perfectly correlated transactions, so we take on no additional interest rate risk. We provide 

resources to the communities that help to build housing units, that 

help to provide construction jobs and, of course, to make a spread 

for the bank, which, as I said, as a mutual, simply goes into the 

reserves of the bank. 

We think it is important that the work that the subcommittee is 

doing as soon as possible can help to restore consumer and investor 

confidence in the Federal Home Loan Bank System and particularly in Fannie Mae and Freddie Mac. I think that it is very important, because I think that all of these GSEs that support housing 

are critically important. The homeownership rates in the country 

have gone up sharply since the founding of the home loan bank 

back in 1932. I am sure there are a number of reasons for that. 

However, the federal home loan bank is certainly one of them. 

With regard to the legislation that is being considered, we think 

it is important that this home loan bank is ensured a robust future, 

that the safety and soundness regulator of the home loan bank is 

indeed a world-class regulator, that the regulator should have the 

ability and the flexibility to allow the banks to develop new products over time, that any legislation, and I think this is critical, does 

not impede the ability of the home loan bank to access capital markets, which they do hundreds of times throughout the day to meet 

the needs of their community bank customers, that the unique nature of the system, that is 12 independently operated cooperatives, 

be preserved, and that Congress should ensure that the SEC recognizes that the system does have unique features that really do not 

apply to other firms, companies and even Fannie Mae and Freddie 

Mac that the SEC will regulate. 

Thanks very much for the opportunity to be here, and I would 

be glad to answer any questions. 

[The prepared statement of Joseph F. Conners can be found on 

page 54 in the appendix.] 

Chairman BAKER. Thank each of you very much. Unless some 

member objects, I am going to suggest we proceed rather informally. I have got just some principles I would like lay out for you 

to respond to and then a series of a few questions. 

41

I recognize the unique nature of the bank system’s structure and 

of its function and that community need, to a great extent, drives 

the product the bank will ultimately deliver. And despite characterizations to the contrary, the housing mission of all GSEs is the reason for their existence. I do not really know of anyone on the committee who would suggest that we should not meet the needs of 

low-income, first-time homebuyers, minorities. That is how we do 

it. That is how we achieve those goals. And to assess the enterprises, as in your case, 10 percent of net profit, in order to achieve 

that goal is a fairly heavy burden. We do not see anything similar 

on the Fannie-Freddie side of that sort. 

And balancing the mission with safety and soundness, that in 

the effort to provide the revenue you need to accomplish your mission, that untoward risk is not taken on in an ill-advised manner. 

Therefore, a strong regulator with unilateral authority to act, 

which I believe the bank system has in the Finance Board structure. 

Having said that, those observations do raise a few questions 

about where we are and where we should go. For example, I did 

not hear and have not read is there a view of the panel as to 

whether it is ill-advised or of no consequence to have a single regulator with mission and safety and soundness combined, as does the 

bank system? 

Some will argue on the committee that we must have a separate 

box somewhere in which mission, product approval activities are 

reviewed and gauged and kept segregated from the safety and 

soundness shop. I think, making full disclosure, that it makes a lot 

of sense to have both in the same facility, as does the current bank 

model. Do you all have any view on the regulatory structure going 

forward or no comment? I will take that. 

Mr. CONNERS. I will comment. I do not see the need or even the 

facility of having two separate regulators. I think I would agree 

with your comments. 

Chairman BAKER. Good. Thank you. Anybody else want to get in 

trouble? 

If not, let me jump to sort of the second observation, and Mr. 

Meyer, you came as close to touching on this with your comments 

in expressing the view and belief that at each district level there 

should be sufficient expertise on the board and in the management 

to appropriately gauge that bank’s risk profile and to ensure that 

nothing goes awry that can be prevented. 

That gets right up to that consolidated debt question of mine. If 

I were in the Dallas Bank and let’s assume it was the Washington, 

D.C. Bank, no reference to Baltimore, Philadelphia, anybody, just 

making this up, and they got engaged in certain activities that I 

would never think of in the Dallas Bank was appropriate but yet 

I am on the hook for that should it go backwards, is that an operational concern of a use of the bank system, and would it be advisable for us to look at some way to on an annual basis have each 

district issue some sort of security to have a level of market discipline? 

Mr. MEYER. Mr. Chairman, I believe that the direction that you 

are headed with appointment of a strong, independent regulator is 

the first step in the process. I think that the system, as it has exVerDate 0ct 09 2002 10:04 Oct 17, 2005 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 G:\DOCS\23733.TXT FIN1 PsN: MICAH
42

isted to date, has worked very well. I agree that there is a legitimate concern as to joint and several liability between the banks. 

I am not sure that I have an answer as to how appropriately that 

would be handled going forward. 

Certainly, from the selling point of having a strong regulator who 

has safety and soundness oversight and control, I think that is the 

beginning point. There may be some refinements that would enhance that, but I think it is a legitimate concern. 

Chairman BAKER. Good. I just think having someone in the market evaluate a bank’s performance is a helpful tool for the regulator, because as we have found out, sometimes the regulator finds 

it first, sometimes the market finds it first. But when you have got 

both of them, you have got a chance of finding it. 

Anybody else have a comment on that market discipline question? 

The other issue that was raised, frankly, by Chairman Greenspan’s comments of a couple of weeks ago where he did not find 

it in itself inappropriate for the banks to engage in securitization, 

I think it is a good way to move interest rate exposure off your 

books and into the market as long as you are not subsequently out 

there buying back your own stuff. That causes me significant concern. 

Do any of you have a view as to the appropriateness or desirability for the system to be authorized to enter into the world of 

securitization.? 

Mr. HEHMAN. I think as a bank president, I want every tool possible to manage the interest rate risk on my balance sheet. I think 

Chairman Rosenfeld very clearly pointed out securitization means 

lots of things to lots of people, and he went from the Ginnie Mae 

model across the spectrum. 

Having said that, I know the Council of Federal Home Loan 

Banks has not taken a position on this. I can tell you that the 

board of directors of my bank believes that a legislative fix for 

securitization is not the answer, but it should be something that 

the regulator, a strong regulator should be able to evaluate in their 

safety and soundness role as a proper financial management tool 

for the Federal Home Loan Banks. So I think it is something they 

ought to at least consider, give strong consideration to. 

Chairman BAKER. Well, from a safety and soundness point, moving interest rate risk exposure off from a housing perspective, if it 

is to generate revenue for housing mission compliance, that is okay. 

Mr. HEHMAN. I understand. 

Chairman BAKER. Leveraging your ability to borrow at low rates 

in the market for other purposes is where I think the concerns 

would lie. 

I also want to explore, Mr. Miller, your comment about the concern about enhanced costs potential with any legislation that might 

move forward to the bank system. 

Mr. Frank and I have had discussions about affordable housing 

goals. Is it your view the 10 percent now required is the ceiling beyond which we should not go because it may have adverse operational consequences or was that an inappropriate conclusion? 

Mr. J. MILLER. The comment more was to additional costs that 

might be laid on the banks that would reduce their earnings and 

43

reduce the ability to—you know, the 10 percent of the earnings, reduce the amount of money that is available for affordable housing. 

Chairman BAKER. Because I do not have any inside knowledge 

here, but I know that the level of assessment of net operating profit 

is something that probably will be discussed, and I just wanted to 

get a clear focus on whether that level of assessment was in today’s 

world an appropriate assessment or was there room to move. And 

I know if REFCOR went away, that would be an easy thing to answer. But I do not think we are going there. 

Unless any of you gentlemen would have further comment, let 

me just say in my own arena with the Economic Development Program, the EDP program, I have found this to be extraordinarily 

valuable but extraordinarily misunderstood or not very well known 

about by member banks, and I am for that purpose convening a little get together in Louisiana soon to have the Dallas Bank come 

over and talk about it in broad terms. 

I do not know how we translate it to the member banks out there 

in the real world what this program offers and what it means in 

the way of small business development, but it is a great program 

and however we can be of help on our side of the fence in making 

more people aware, I certainly want to offer that. 

And then thank each of you for your participation here this 

morning. It has been most helpful to us. And I can assure you your 

remarks will be forwarded to every member and will be reviewed 

in the course of our work going forward. 

Our meeting stands adjourned. Thank you. 

[Whereupon, at 12:24 p.m., the subcommittee was adjourned.] 

(45)

A P P E N D I X

March 9, 2005

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